CHICAGO — Advisers are using creative techniques to work within the dense tax code to help their clients reduce their tax payments.
Chief among these techniques is avoiding the onerous alternative minimum tax, reducing a person’s estate tax or lessening the overall tax burden through various means.
But many of these strategies can help people escape the AMT, said Thomas P. Ochsenschlager, a vice president in the New York-based American Institute of Certified Public Accountants’ tax division in Washington.
If taxpayers don’t claim their dependents, it might help them escape the AMT — especially if they have more than two children, he said.
What’s more, taxpayers on the bubble for paying the AMT should not claim state or local income tax and instead claim the sales tax, Mr. Ochsenschlager said.
“This sounds counterintuitive,” he said, “but we’ve found people who are better off claiming a sales tax deduction, even though it’s less. By claiming the sales tax, there might be enough of a difference where they won’t be in the AMT.”
The AMT operates like its own tax system and has rules for deductions which are different from those of the traditional tax system. Often people with four or five children, for instance — or who reside in states with high taxes — are more vulnerable to the AMT.
Advisers and CPAs grapple with this problem every year, Mr. Ochsenschlager said. “It’s a real quagmire; it’s like falling in a tar pit.”
These strategies don’t always work, but software has made it so easy for advisers and CPAs to use dozens of different circumstances to discover the best alternative for clients, said Marc Minker, managing director of private-client and family office services with Mahoney Cohen & Co. of New York.
At this time of year, there are deductions that people often forget about that could help reduce their taxes or even keep them out of the AMT, said Alan L. Olsen, a certified financial planner and managing partner of Greenstein Rogoff Olsen & Co. LLP, based in Fremont, Calif.
Individuals who drive hybrid cars can earn a credit up to $500 for 10% of the costs. Home improvements such as the purchase of storm doors, windows, heat pumps, water heaters, central air conditioning, furnaces and other types of energy-saving devices also can qualify for tax credits.
Meanwhile, it also is the time of the year when the elderly look at ways to reduce their estate taxes, and since federal tax breaks for Section 529 plans were made permanent last year, more older people are considering funneling their money into those plans.
“Basically, clients are always looking for a way to get money out of their estate and maintain control over it,” said Stephen Hartnett, an attorney with the San Diego-based American Academy of Estate Planning Attorneys.
Section 529 plans are appealing to taxpayers who want to avoid estate taxes, said financial adviser Frank Corrado, a partner in Lighthouse Financial Advisors Inc. of Red Bank, N.J.
“[Such] plans aren’t covered by the $12,000 gift tax annual exclusion, and it’s a way to put money away ahead of time,” he said.
Any gift worth more than $12,000 traditionally is taxed, but with 529s, people can give multiple individuals $60,000 in a year.
Another strategy that some advisers are encouraging seems odd on the surface but can be a huge tax savings, said Rick Miller, an adviser with Cambridge, Mass.-based Sensible Financial Planning and Management LLC.
He has advised clients in certain circumstances to invest in a large chunk of bonds in a tax-free account, such as a 529 plan, while keeping more equities in a taxable account, such as a mutual fund.
“The choice of which account to use to hold which kind of assets can have a big impact on your tax bill,” Mr. Miller said.
He said it’s important to place bonds in tax-free accounts, such as individual retirement accounts, 529 plans or 401(k) plans, because bonds are taxed at ordinary income tax rates. For high-income individuals, those rates often are higher than the
capital gains tax owed from the sale of appreciated stock.
This is an effective strategy, agrees Michael Anderson, vice president of Evensky & Katz Wealth Management of Coral Gables, Fla.
“We think efficient portfolio design is one of the best tax savings methods,” he said.
But there are other ways to reduce tax liabilities.
Shelley Ferro, a certified financial planner with Metairie, La.-based Ferro Financial LLC, relies on health savings accounts to reduce tax liabilities.
Clients were grousing about steep insurance premiums, she said. Ms. Ferro advised them to set up a health savings account, and they saved money on their premiums and received a significant tax deduction.
“They’re thrilled,” Ms. Ferro said. “They’ll get a tax deduction. It’s going to be a few thousand dollars they get to deduct on their tax returns.”
