Year-End Tax and Overall Planning Considerations from Summit Financial Resources

This alert from EO New Jersey sponsor Summit Financial Resources is to bring your attention to the many direct and indirect increases to the income tax rates starting in 2013. These increases are a result of the Patient Protection and Affordable Care Act of 2010 and the American Taxpayer Relief Act of 2012 as well as other legislation which affect 2013 income taxes. It also points out some areas of planning that you may wish to consider before year-end, not only to mitigate the effects of these tax rates for 2013 and future years, but also with respect to your overall planning.



      • Regular Tax – from 35% to 39.6% on Taxable Income over $400K for Single – $450K for Married Filing Joint
  • Capital Gains – from 15% to 20% for Taxpayers in 39.6% bracket
  • Investment Income – new 3.8% add on tax on lesser of Net Investment Income or Adjusted Gross Income (“AGI”) over $200K for Single – $250K for Married Filing Joint
  • FICA Tax increase – new additional 0.9% HI Tax on Taxpayers Wages received with respect to employment in excess of $200,000 for Single – $250,000 for Married Filing Joint


  • Itemized Deductions – phase out up to 80% of deduction for AGI over $250K for single – $300K for Married Filing Joint
  • Personal Exemption – phase out for AGI over $250K for single – $300K for Married filing Joint – entirely phased out at $422,500

Higher Adjusted Gross Income (“AGI”) means

  • Phaseout of itemized deductions
  • Phaseout of personal exemption
  • Phaseout of AMT exemption
  • Greater percentage of FICA taxable

Focus Income Tax Planning on Reducing Income Rather than Increasing Deductions.

Discuss with your accountant whether your estimated tax payments for 2013 are sufficient.

Areas to consider in reducing AGI

  • Time Income if possible
        • Split sales into 2 years to keep AGI under threshold.
        • Installment sales.
        • Sec.1031 like kind exchanges.
  • Make sure the sale of your primary residence doesn’t generate capital gains which will put you over the threshold.  
        • Apply $250,000 ($500,000 for married couple) Capital Gain Exemption.
        • 2 year holding period.
        • Include all expenditures that will increase basis.
  • Hold highly appreciated assets until death
        • Step up in income tax basis to fair market value at death.


Maximize Contribution to Qualified Retirement Plans 

  • 401(k)’s: – increase deferrals up to $17,500 this year.
    • if age 50, contribute $5,500 on catch-up.
    • add a profit sharing plan. 
  • SEP – can be funded after year-end up to due date of tax return. 
  • Defined Benefit Plan or Cash Balance Plan – consider adopting for your business before year-end.

Consider a Non-Qualified Deferred Compensation Plan

Know how retirement income helps or hurts 

  • Taxable payments from pension plans, IRAs and social security are not considered “Net Investment Income” for purposes of the additional 3.8% tax. 
  • These payments of income do raise AGI which could result in other investment income being exposed to the tax. 
  • Best income is a Roth IRA payout – it’s not income and is not taxable.
    Also, Roth IRA payouts do not raise Medicare premiums or tax on social security payments.

Consider Roth IRA conversion 

  • Conversion could make sense for Taxpayer who may have income above the thresholds later in retirement e.g. people waiting until 70 to take social security and IRA withdrawals.


Tax Harvesting of Capital Losses 

  • Up to amount of capital gains plus $3,000. 
  • Excess losses can be carried forward.

Cautions: (1) NJ does not allow loss carryovers so may want to limit losses to gains;
(2) Remember wash sale rules when buying replacement securities.

Tax Location 

  • Allocate income generating investments e.g. high yield bonds, REITs – (nonqualified dividends) and high turnover mutual funds/hedge funds in tax sheltered accounts such as IRAs, 401(k)s, pensions, Tax Deferred Annuities. 
  • Taxable accounts – fund with growth investments and municipal bonds.

Recognize what income is exempt from the 3.8% tax 

  • Tax free muni bond interest (but not Capital Gain on sale of bonds).
  • Life Insurance proceeds, loans on cash value, surrenders up to basis.
  • Gifts and Inheritances.
  • Appreciated assets donated to charity.
  • Income from Real Estate activity earned by a “qualified professional” (750 hours actively managing Real Estate and these hours need to be more than 50% of working hours).
  • Sub S Shareholders actively involved in the business (e.g. 500 hours a year), but not business income from trading financial instruments or commodities. 
  • Active partners of a partnership – no 3.8% on business income, unless from trading financial instruments or commodities.


Charitable Contributions

  • Charitable gift of appreciated stock rather than cash eliminates the capital gain on the sale of the stock which would increase AGI.
  • Qualified Charitable Contributions
    • If client is over 70 1⁄2, he can make a direct transfer of up to $100,000 from his IRA to charity.
    • The transfer is not included in AGI. There is no itemized deduction, but the deduction may be phased out anyway.
    • This opportunity is for 2013 ONLY. d. Does not apply for NJ income tax.


Gifting 

  • Don’t forget that the annual gift tax exclusion of $14,000 ($28,000 if gift splitting) needs to be used by the end of 2013 or you lose it. 
  • In addition to annual exclusion gifts, consider making tax-free gifts using your lifetime gift tax exclusion ($5.25 M per individual; $10.5M per married couple over lifetime). 
  • Gifts to Irrevocable Trusts – Make sure you have Crummey withdrawal notices sent.

Trust Taxation 

  • Net Investment Income retained in a trust is subject to 3.8% tax on income above $11,950.
  • Health Care Proxy, HIPAA Authorization, Living Will and Power of Attorney 
    • A child becomes an adult when he or she reaches age of majority (age 18 in most states including NJ, NY and CT). At that point you no longer have the authority to make medical decisions for him or her or to access your child’s medical records. You should consider having that child execute a Health Care Proxy and a HIPAA Authorization to Disclose Medical Information giving you this authority in the event your child is incapacitated, along with a Living Will and a Durable Power of Attorney.


Health Savings Accounts (HSAs) 

  • Contribute maximum amount to your HSA (Self-Only – $3,250; Family – $6,450) before year-end. This money can be rolled over from one year to the next.

Flexible Spending Accounts (FSAs) 

  • Use remaining balance in this account as soon as possible. Carryover to future years is limited. The Plan may provide a grace period of no more than 2 1⁄2 months following the end of the plan year to incur and still get reimbursed for qualified medical expenses. As an alternative, plans may provide that up to $500 be carried forward to future years. However, the 2 1⁄2 month grace period would then not be available.

Consider accelerating payment of state, local and real estate taxes into 2013.

Please contact us if you would like to discuss how you are impacted by any of the above. We would be happy to discuss strategies that may be appropriate for you to incorporate into your year-end and long-term planning.

DISCLAIMER: This memorandum was produced by Summit Financial Resources, Inc., 4 Campus Drive, Parsippany, New Jersey 07054. Phone: 973-285-3600, Fax: 973-285-3666. It is for your information and guidance and is not intended as legal or tax advice to you or your clients. Legal and/or tax counsel should be consulted before any action is taken.