Surviving the New Tax Landscape: Smart Savings, Investment and Estate Planning Strategies

By FEDweek

Surviving the New Tax Landscape with Smart Savings, Investment & Estate Planning Strategies will prove to be indispensable because it directly addresses the new Tax Landscape that we have all been dealt. These are difficult times for all Americans and this special report will spell out for you in plain-English what changes you should make now to protect what’s yours.

Keep your money growing through this crisis, the next crisis...and the one after that. Year after year we face new crisis: the Dot-com market crash, real estate bubble and sub-prime mortgage crisis, financial meltdown, European debt crisis, increasing damage from natural disasters, a structural funding crunch in the federal government and so on. What’s next?

For one thing, it looks like taxes will increase, in part to subsidize promised entitlements as well as reverse a trend toward unsustainable outlays and debt.

Increasing complexity is on the way as well. The tax code grows more and more complex every year - now compounded with the new healthcare law.

Finally, you can expect ongoing market volatility with so much uncertainty persisting around the world and at home, along with the potential of lower yields in some seemingly safe investments.

That’s where this book comes in. Surviving the New Tax Landscape is designed with these questions in mind to help you decide how to avoid pitfalls and come out ahead.

• Language: English
• Publisher: BookBaby
• Release date: Dec 12, 2013
• ISBN: 9781483516097

Book preview

Thoughts

CHAPTER I

The New Tax Landscape

As 2012 came to a close, Americans feared the nation was falling off a fiscal cliff. Federal law called for both steep tax hikes and severe spending cuts, which risked triggering a deep recession.

The worst of the tax hikes were avoided when the American Taxpayer Relief Act (ATRA) of 2012 was passed in early 2013. The new law retains most of the provisions that were in effect during 2012, with a few important changes.

•   A higher tax bracket was added. Through 2012, the highest federal income tax rate was 35%. The new law adds a 39.6% tax rate on high incomes.

•   A higher tax rate for investment income. Through 2012, the highest federal tax rate on most long-term capital gains and qualified dividends (the dividends received by most investors) was 15%. The new law adds a 20% tax rate on long-term gains and dividends reported by people with high incomes.

The new 39.6% and 20% rates are now owed by people with taxable income over $400,000, or $450,000 for married couples filing joint returns. That’s taxable income, after deductions, so taxpayers may need $500,000 in gross income to owe these rates. Nevertheless, people who consider themselves to be middle-income may have to deal with these high rates, perhaps in years when they sell assets at a profit or when they convert a traditional IRA to a Roth IRA.

ADD-ON TAXES

Even if you never have to worry about the 39.6% tax rate on ordinary income, other tax increases in the ATRA may hit close to home:

•   You may lose some of your personal exemption. In 2013, every personal exemption you claim can cut your taxable income by $3,900.

•   You may lose some of your itemized deductions. The deductions exposed to this cutback include charitable donations, mortgage interest, state income taxes, and local property taxes.

For both of these provisions, the reduction in deduction value will hit taxpayers with over $250,000 in adjusted gross income (AGI), or $300,000 for couples filing jointly. As mentioned, those are AGI numbers, so someone with much lower taxable income, after deductions, could pay much more in tax because of these tax traps.

Still another new tax, effective in 2013, does not come from ATRA. Instead, a 3.8% Medicare surtax results from federal health insurance legislation passed in 2010, sometimes known as the Affordable Care Act.

•   This surtax is based on net investment income. For this surtax, you’ll have to pay if your modified AGI (regular AGI for most people) is over $200,000, or $250,000 for couples filing jointly. As you can see, the income thresholds are even lower here, so more people may face this surtax.

The way the surtax is calculated, you start with your investment income for the year. That’s your investment interest, dividends, capital gains, rental income, and so on. From that number, you subtract investment-related expenses to get your net investment income (NII) for the year.

Then you compare your AGI with the appropriate $200,000 or $250,000 threshold. You’ll owe 3.8% tax on whichever is smaller: your NII or the amount your AGI is over the relevant threshold.

Suppose Richard Bennett is single, with AGI of $240,000 in 2013. Thus, Richard is $40,000 over his threshold. If Richard has NII of $25,000 this year, he’ll owe the 3.8% surtax on his $25,000 of NII, which is smaller than $40,000. However, if Richard’s NII is $41,000 or $50,000 or any number larger than $40,000, he’ll owe the 3.8% surtax on $40,000—the excess over the $200,000 threshold—because that will be smaller than his NII.

WHEN ZERO ADDS UP

As you can see, the new tax rules are aimed primarily at high-income taxpayers. At the same time, lower-income taxpayers continue to get one of the best breaks in the tax code: a 0% tax rate on long-term capital gains and qualified dividends.

The 0% tax rate can be used by taxpayers in the two lowest federal income tax brackets: the 10% and the 15% brackets. In 2013, that means single taxpayers with taxable income up to $36,250, and married couples filing joint returns with income up to $72,500.

Suppose, for example, your parents are retired, with annual income of $75,000. After deductions, their taxable income will be around $60,000. In this scenario, say that you invested $20,000 in a mutual fund a few years ago. As the stock market has risen, your shares of this fund are now worth $30,000, and you want to take your profits.

If you sell the shares yourself, the $10,000 long-term capital gain probably would be taxed at 15%, or even more if you run into some of the new wrinkles in the tax code. Instead, you can give the shares to your parents, who can make the sale.

Your parents would report the $10,000 long-term capital gain on the sale, bringing their taxable income for the year up to about $70,000. That’s still under the $72,500 ceiling, so your parents would owe 0% tax on the sale.

Can you accomplish the same thing by giving away appreciated securities to your children? No as easily. The so-called kiddie tax limits low-taxed investment income reported by youngsters to $2,000 apiece, in 2013. After that, additional investment income is taxed at the parents’ rate. The kiddie tax no longer applies after age 19, if your children no longer go to school full-time, or after 23 if they’re still in school. Thus, you may find some income-shifting opportunities by giving away appreciated assets to children just starting their careers, with low compensation, or to graduate students 24 and older.

In any case, giving assets worth more than $14,000 to any single recipient in 2013 probably will require you to file a gift tax return. You aren’t likely to owe gift tax, though, thanks to the $14,000 annual gift tax exclusion and the $5.25 million lifetime gift tax exemption.

HOME SWEET HOME SALES

The new tax law extends many tax benefits, such as the American Opportunity tax credit and the child tax credit. Such tax breaks, though, have income limits that effectively exclude many taxpayers.

One major tax benefit is still available, though, regardless of your income. When