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December Tip of the Month


Many a credible tax planner (yep, like us at Abo and Company) are pretty busy this time of year.  Better to run multiple scenario tax projections in the days/weeks/months before December 31ST to see what, if any, year-end maneuvers can be implemented to minimize your tax burden.  We may also be able to suggest legitimate approaches to minimize underestimation of tax penalties that otherwise will come due with the ultimate filing of the 2013 returns in 2014.

What's that bummer we were alluding to above?  Well, we took one of our recent tax planning sessions and tried to simplify it for you to illustrate our point.  Doing NOTHING to alter 2012 (column one below), take a look at the extra federal tax hit the poor couple (okay, okay, not so "poor") gets socked with in 2013.  An extra $20,725.



Why  almost $21,000 in additional federal income taxes?

Well, really trying to streamline the many causes, you should note:

  • For most individuals, the ordinary federal income tax are the same as they were in 2012: 10%, 15%, 25%, 28%, 33%, and 35%. However, the maximum rate for higher-income individuals to 39.6% (up from 35%). That change affected those with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, and $425,000 for heads of households.
  •  In 2013 the new 0.9% Medicare tax on wages and self-employment income and 3.8% Net Investment Income Tax comes into play when modified adjusted gross income (or earned income in the case of the Medicare tax) goes over $200,000 for unmarried, $250,000 for joint filers.  As you'll see, this really results in higher effective tax rate than the politicians would lead you to believe.
  •  The maximum long-term capital gain and qualified dividend rate for higher-income taxpayers is now 20% (up from 15% in 2012). This rate jump only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.
  •  In 2013, exemptions are phased out and ultimately eliminated for higher-income Individuals. After Phase-out starts at Adjusted Gross Income (AGI) of $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals filing separately. Again, a rather sneaky approach to increase an effective tax rate over what is advertised as the "top tax rate".
  •  Similarly, the phase-out rule for some of the most common itemized deductions is also back in 2013. As a result, higher-income clients can potentially lose up to 80% of their write-offs for mortgage interest, state and local income and property taxes, charitable contributions, and miscellaneous itemized deductions. This phase-out begins at Adjusted Gross Income of $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married filing separately.

As we mentioned earlier, clients often wish to set up an appointment to go over several tax and financial planning issues we and our tax-planning colleagues, suggest and even consider preparing 2013 tax projections to at least see what tax planning strategies, if any, can be implemented before year end.  We and other CPAs typically leave it up to the individual whether or not they wish to incur such professional fees.  Quoting Marty Abo , "I just dread having to possibly say even as far away as it seems April 15th is '...this is what you could have done'."

The point of all this?  MEET WITH YOUR TAX ADVISOR!