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13 Financial Planning Strategies for 2013
by Steven D. Brett, President of Marcum Financial Services LLC

With the passing of the American Taxpayer Relief Act of 2012 (ATRA) in reaction to the fiscal cliff we finally have certainty on the tax landscape for 2013. Bottom line, taxes are going up for almost everyone, with some being affected more than others. Changes impact income taxes, capital gains and dividend taxes, Medicare taxes, limitations on itemized deductions, AMT and estate and gift tax exemptions.

There are a number of actionable strategies that can help reduce 2013 taxes. Work with your financial advisor and tax professional to review the new tax environment and how your financial objectives may be impacted.

This article summarizes the changes resulting from ATRA and offers 13 financial planning strategies for you to consider in 2013.

What has Changed for 2013?

The following highlights the most significant changes that took effect January 2, 2013:

Income Taxes
Highest income tax bracket increased to 39.6% from 35.0% for individuals earning $400,000 or more and joint filers earning $450,000 or more a year. The maximum corporate income tax rate remains 35%.

Long-Term Capital Gains and Dividends
Capital gains and dividend taxes increased to 20% from 15% for individuals and families in the new 39.6% bracket.

New Medicare Taxes
As part of the healthcare reform bill, an additional 3.8% Medicare surtax on investment income for individuals earning more than $200,000 a year and joint filers earning more than $250,000 a year took effect as well as a 0.9% surtax
on wages in excess of the same thresholds.

Roth 401(k) Conversions
Greater flexibility for in-plan Roth conversions in 401(k)s, 403(b)s and 457 plans.

Personal Exemptions
Personal exemption phaseouts were reinstated with exemptions reduced by 2% for each $2,500 of income that exceeds a threshold of $250,000 for individuals or $300,000 for joint filers.

Itemized Deductions
The limitation on itemized deductions was also reinstated, reducing the value of most itemized deductions by 3% of adjusted gross income in excess of $250,000 for individuals and $300,000 for joint filers (but no more than 80% of impacted itemized deductions).

Estate and Gift Taxes
The maximum federal gift and estate tax rate increased to 40% with a $5,250,000 (2013) exemption amount indexed for inflation; exemption portability was also made permanent.

Alternative Minimum Tax (AMT)
Annual AMT adjustments for inflation were made permanent.

Payroll Taxes
The 2011 temporary cut to Social Security payroll taxes was not extended, increasing them from 4.2% to 6.2%.

13 Planning Strategies:

  1. Consider the Types of Income Your're Generating
    To counter, or reduce the overall impact of rising taxes, evaluate your income sources. Varying types of income are taxed differently.
  2. Review Your Portfolio's Tax Efficiency
    Review your portfolio’s turnover ratio and historical distributions to get a sense of your annual tax liability, and take steps to add more tax efficient investments to minimize taxes
  3. Align Investments with Account Types
    Certain investments may be better suited for certain account types from a tax standpoint. For example, carry income-producing investments in a tax-advantaged account such as a 401(k) or IRA where taxes are deferred until later years and opt for stocks held long term or tax-advantaged municipal bonds in a traditional brokerage account.
  4. Take Advantage of Opportunities for Tax-Deferred Growth
    Tax-deferred growth is even more advantageous when taxes are higher. You can lower your taxable income now and reduce taxes by capitalizing on the following strategies:
    Qualified Plans
    Defer up to $17,500 a year, $23,000 if you’re age 50 or over, into a 401(k) or 403(b) plan.
    Individual Retirement Accounts
    You may also be able to deduct IRA contributions, even if you participate in a retirement plan at work, if your modified adjusted gross income is under $69,000 for individuals or $115,000 for joint filers. The maximum contribution to a traditional or Roth IRA in 2013 is $5,500, $6,500 if you’re age 50 or over.
    Annuities also offer an opportunity for tax-deferred growth on assets.
    Life Insurance
    Accumulating cash value in life insurance can also offer tax-deferred growth and tax-advantaged retirement income.
  5. Consider Roth 401(K) Conversions
    The advantage of making the conversion now is you pay the taxes today for a tax-free distribution later in life when you could be in a higher income tax bracket or taxes may have risen further.
  6. Use Deferred Compensation
    Deferred compensation strategies in qualified (401(k)) and nonqualified (supplemental employee retirement plan (SERP), life insurance) plans - available through many employers - are an excellent way to defer or minimize income taxes over the long term. By using a deferred compensation plan, you can defer compensation into future years when your income may be lower, you may have more deductions or tax rates may be lower due to legislative changes.
  7. Revisit Your Planned Charitable Giving
    Charitable giving can reduce your tax burden and also provides a sense of satisfaction by benefiting your favorite causes. Generally, donations to qualified charities count as an itemized deduction for that tax year.
  8. Monitor Your Cost Basis
    Review your cost basis information regularly to ensure accuracy, and avoid paying more in capital gains tax than needed.
  9. Manage Short-Term Cash Flow Needs
    If you’re faced with short-term liquidity needs such as a large tax bill or another significant expense like a family member’s college tuition, think about how you will pay for it. Don’t immediately default to selling part of your portfolio that could result in capital gains. Consider options that may ultimately cost less to meet your cash flow needs.
  10. Consider the Advantages of Your Mortgage
    Mortgage interest deductibility was not affected by ATRA as some had predicted, but the overall limitation on itemized deductions - sometimes called the 3% haircut – has been reinstated, reducing the value of total allowable itemized deductions for individuals with income in excess of $250,000 or for joint filers with income in excess of $300,000. As a result, many affluent investors may no longer realize the full deductibility of their mortgage interest and ask whether they should stay invested or pay it down faster. Additionally, when purchasing a new property they may ask whether they should liquidate assets to pay cash or whether they should finance the purchase.
  11. Review Your Estate Plan
    Estate planning means ensuring your assets will be used according to your wishes, both now and in the future. ATRA raised the maximum estate tax rate to 40% and made permanent the $5,000,000 estate tax exemption amount (indexed for inflation going forward; $5,250,000 in 2013). Portability of this exemption between spouses was also made permanent
  12. Watch for Alternative Minimum Tax (AMT)
    ATRA permanently “patched” the AMT for 2012 and subsequent years by increasing the exemption amounts and indexing them for inflation. The 2013 AMT exemption is expected to be $51,900 for individuals and $80,750 for joint filers
  13. Work with Your Financial Advisor
    Planning for your taxes and overall financial position in light of the American Taxpayer Relief Act of 2012 is important, but it may also feel daunting. To get started, we recommend you work with your financial advisor to review the new tax environment and how your financial objectives may be impacted.


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