Ring out the old year with a bowlful of tax strategies

Tips to help make 2014 less painful than 2013 for wealthy clients

Nov 6, 2014 @ 12:08 pm

By Darla Mercado

With fewer than eight weeks left in the year, it's time to gear up for year-end tax planning.

This year was a painful one for many high-net-worth taxpayers as they contended with higher levies on their 2013 returns from the American Taxpayer Relief Act of 2012. “When ATRA was enacted on the first day of 2013 and the new tax rates came in, people didn't understand how different it was going to be,” said Gavin Morrissey, senior vice president for wealth management at Commonwealth Financial Network. “It was an expensive lesson learned by everyone.”

To refresh your memory, ATRA had the greatest effect on the highest earners: single filers with taxable income over $400,000 and married-filing-jointly taxpayers with taxable income over $450,000. Those two groups are now subject to a top marginal income tax rate of 39.6%, as well as a top marginal tax rate of 20% on long-term capital gains.

Those with more modest incomes, beginning at $250,000 for singles and $300,000 for married-filing-jointly, face the phaseout of personal exemptions and itemized deductions — known among tax geeks as “PEP and Pease.”

Additional levies await singles with $200,000 and married couples filing jointly with $250,000 in income: They face a 3.8% surtax on the lesser of income over those thresholds or net investment income, and a 0.9% Medicare tax on wages over those thresholds.

With most of the year behind us, advisers are dealing with clients who not only wrote some large checks to the tax man in April but have assets that have climbed in value. The S&P 500 is up about 10% year-to-date, setting the table for potential capital gains taxes.

Here are just a few tips for advisers on how to help clients keep from being scalped:

1. Search for opportunities to harvest losses: It might be a no-brainer to go through a client's holdings for loss opportunities at this time of the year, but given the bull market we've been through, advisers should look harder.

“The market is high, so this year is different: there are few opportunities for loss harvesting, and we're looking for opportunities to avoid capital gains taxes,” said Jean-Luc Bourdon, a certified public accountant and personal financial specialist at BrightPath Wealth Planning.

2. Think about donor-advised funds and charitable opportunities: Mr. Bourdon has been using donor-advised funds for clients who are inclined to give cash each year. If you need to rebalance a client's holdings, think about donating that appreciated stock to charity so that you reap the benefit of avoiding capital gains and gaining a charitable deduction. Bonus: If clients held the stock for more than a year, they will get the full-market-value deduction for the contribution, Mr. Bourdon noted.

A survey from UBS Wealth Management Americas of more than 2,200 high-net-worth and affluent investors showed that 91% of millionaires participate in philanthropy each year, and nearly 40% donate at least $100,000 in their lifetime. Giving isn't limited to the wealthiest investors, either.

“Charitable planning is on the table for high-net-worth clients, and those who aren't but who want to frontload charitable giving into the future,” Mr. Morrissey said.

3. Don't forget about the Roth conversion.

“The Roth conversion is more valuable than it was before, as rates go up,” said Bruce D. Steiner, a tax attorney at Kleinberg Kaplan Wolff Cohen.

This is an opportunity to combine strategies: If a Roth conversion makes sense for a client at a given time, offset the income tax on the conversion by using the deduction you get from a charitable gift, according to Mr. Morrissey.

4. Consider accelerating deductions where possible. Clients who expect to earn a lot of income this year might want to consider accelerating their deductions and deferring their income as much as they can, in order to minimize the bite they'll face on income taxes.

“Not many people have the option of timing the receipt of income, but talk to your tax preparer and see if there's anything you can do in the last two months that can make a difference,” Mr. Morrissey said.

5. Think about creative sources of deductions. Do you have a client who racked up considerable medical expenses over the course of 2014? Mr. Bourdon suggests weighing what those expenses might mean for the client's tax return. Taxpayers can deduct the amount by which total medical costs exceed 10% of adjusted gross income, or 7.5% if the taxpayer or spouse is over 65.

“We reach a period in our lives where we incur high medical expenses, so when we hear that a client is in a care facility or is having a health crisis, we think about what it means for the tax return and how much that deduction will be,” he said. “Medical expenses can be so significant, they'll make a big change in your tax situation.”

Stay tuned for more tax strategies and tips as the year winds down.

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