Mixing tax time and the holidays

The next eight weeks are critical for both investors and their financial advisers. It is the time when year-end tax planning takes place. Financial advisers are aware of this season, but clients usually need to be reminded and encouraged to take steps to minimize the income taxes they will pay for 2014. Unfortunately, tax planning time occurs amid one of the busiest periods of the year — holiday season, and all the shopping, travel and entertaining it involves. So it can be hard for advisers to get clients' attention for long enough to draw up and embrace a plan to minimize their tax burden. Financial advisers should be urging their higher-income clients — singles with taxable income of more than $200,000 a year, and married couples earning more than $250,000 a year — to come in for tax planning sessions. This outreach should remind those clients of some of the tax increases imposed by the American Tax relief Act of 2012.

CHANGES

For example, those with taxable income of more than the $200,000 and $250,000 thresholds face a 3.8% surtax on the lesser of income over those amounts or net investment income, a 0.9% Medicare tax on wages over the thresholds, and a phasing out of personal exemptions and itemized deductions. Clients with taxable income of over $400,000 a year face higher marginal income tax rates, higher long-term capital gain rates, and the loss of deductions and exemptions. Financial advisers should talk to clients about all the available steps to minimize their income tax burden — for example, selling some losing stocks to harvest capital losses to offset capital gains, even though the clients might be reluctant to take losses on stocks they feel are certain to come back. Clients also could be encouraged to donate some appreciated assets to charities for deductions to offset taxes. Advisers also should steer clients to look ahead and see what steps they can take to prepare to minimize taxes in 2015. Though getting clients to focus on these matters may be difficult in the holiday rush, advisers should be using all available tools to reach out.