Advisers brace for onslaught as Tax Day nears

New tax laws mean new and perhaps unexpected liabilities for clients – and even some advisers

Mar 27, 2014 @ 2:09 pm

By Darla Mercado

Advisers: Brace yourselves for what's likely to be an onslaught of taxes for clients as they prepare their 2013 tax returns.

The ill effects of the American Taxpayer Relief Act of 2013 are no secret to tax professionals, financial advisers and high-net-worth clients. In fact, if you've been doing your homework, you've probably been beating the "prepare for higher taxes" drum for well over a year.

For those of you who haven't been paying attention, here's a breakdown: Single filers with taxable income over $400,000, and married taxpayers who file jointly and have taxable income over $450,000 will face a top marginal income tax rate of 39.6%. Those top-earners will also be subject to a top marginal tax rate of 20% on long-term capital gains, and a 3.8% surtax on net investment income. The latter levy applies to singles earning over $200,000 and married-filing-jointly taxpayers with more than $250,000 in income.

There's also the dynamic duo of PEP and Pease: The phase out of personal exemptions and itemized deductions.

And then there's the matter of those state capital gains rates.

Anecdotally, those with the biggest tax bills tend to procrastinate. But some clients and advisers have been gearing up for the tax season ahead of time, and projections they've seen so far are looking ugly.

"I have a client with some large capital gains that all happened last year," said Lyle Benson, a certified public accountant/personal financial specialist who is president of LK Benson & Co. "Many clients get one big year because they've sold a company or they invest in something that pays off big."

Even clients with income holding steady can expect to see a 10% to 15% increase in their tax bill for 2013 compared with the previous year, he added.

In the aforementioned worst case, Mr. Benson had a client with a $2 million tax bill on massive capital gains, all of them tied to the 3.8% net investment income tax. Fortunately, the CPA and client came up with the $2 million figure after doing a projection in the middle of last year. To mitigate the tax blow, Mr. Benson and the client came up with a strategy wherein they set up a private foundation, moved some of the capital gains to charity and cut down the investor's tax rate.

Timely preparation is everything in such cases.

"The conversation of what can we do about it is very good to have during the year, but it's hard to do it now," said Mr. Benson. "There isn't a lot you can do to impact that after the end of the year."

Even advisers themselves aren't immune to the tax bite for the 2013 tax year, particularly after their own investments fared well last year – the market was up by about 30% in 2013. "I've heard quite a bit from the advisers themselves," noted Gavin Morrissey, senior vice president, wealth management at Commonwealth Financial Network. "They're getting hit pretty hard on their own personal income taxes. Not many people were spared."

The lesson's going to be a tough one for advisers and clients alike: But if anything, a large tax bill come April 15 might be the only way to convince clients of the value of doing tax planning throughout the year and in anticipation of the filing season. Even if clients end up facing a bill, it's better to head it off with planning in advance to mitigate the blow or to at least prepare investors mentally and financially for the shock.

"The only thing that's worse than owing on April 15 is not expecting to owe on April 15," said J. Christopher Raulston, wealth strategist at Raymond James & Associates Inc. "What's difficult, especially with the 3.8% tax, is when you have a huge tax bill and it's a surprise: So will you have the liquidity to pay for it?"


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