Traditional tax planning 'turned on its head' this year

Medicare surcharge for high earners upends conventional strategies; just do the opposite

Sep 4, 2012 @ 3:50 pm

By Liz Skinner

Few options exist for wealthy Americans looking to reduce their exposure to the 3.8% health care surcharge on investment income, coming next year. Recommendations for lowering the levy fly in the face of normal tax planning, according to a financial adviser.

“The tax planning of old is going to be turned on its head this year,” said Art Graper, a financial planner and managing director of Atlantic Trust Private Wealth Management, a unit of Invesco Ltd., which manages $18.9 billion in assets. “For the remainder of this year, throw out the window all the usual advice and basically do the opposite.”

Mr. Graper, who has worked with high-net-worth clients for 16 years, said he offered such advice to few clients in the past. He is giving it more now, however, because of the increase in the capital gains tax rate to at least 18.8% next year — a rise stemming from the health care surtax. The capital gains level could go to as high as 23.8% if Congress doesn't extend the Bush-era tax cuts by Dec. 31.

First and foremost, Mr. Graper suggested, deal with highly appreciated assets and pay today's 15% capital gains tax or consider donating the asset to charity, which most likely won't have to pay on the investment gains.

Passage of the Affordable Care Act in 2009 means a 3.8% tax will be added to capital gains and other investment income for families earning $250,000 or more, or individuals making $200,000. The proceeds from the new tax will be used to help fund the Medicare system. It's one of the few measures that experts consider a definite for 2013 because of the uncertainty over whether Congress will extend other tax cuts.

Mr. Graper's recommendations include buying tax-exempt municipal bonds, converting individual retirement accounts to Roth IRAs — distributions aren't taxed — and seeking rental real estate, which typically generates passive losses because of depreciation deductions.

In addition, he recommended structuring businesses as S corporations, which don't have to pay self-employment taxes (also scheduled to go up under the health care bill). Consider oil and gas investments, which have “very favorable” tax preferences.

Finally, installment sales that defer recognition of a gain over a longer period could help taxpayers keep income under the federal thresholds that trigger the health care surcharge, Mr. Graper said.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

Why blockchain matters to financial advisers

Lex Sokolin, a futurist and entrepreneur focused on the next generation of financial services, explains why every financial adviser should pay attention to blockchain and so-called cryptocurrencies.

Latest news & opinion

Nontraded REITs to post worst sales since 2002

The industry is on track to raise just $4.4 billion, well off the $19.6 billion it raised just four years ago, as new regulations hinder sales.

Broker protocol for recruiting a boon for clients

New research finds advisers whose firms have joined the agreement take better care of customers.

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print