How to preserve wealth through the 2013 tax season

Reducing your above-the-line income is a smart strategy this year as higher tax brackets go into effect.  

Monic Ramirez, CPA and senior tax manager at Sensiba San Filippo LLP, says there are several income thresholds that should be managed, and planning should start now in order to avoid costly financial errors at the end of the year.  

“Reducing above-the-line income will minimize the effects of the higher tax brackets and maximize the tax savings from deductions,” Ramirez says.

Smart Business spoke with Ramirez about strategies to implement immediately to position yourself for a more favorable tax bill in April 2014.

What are strategies for utilizing savings plans?

I advise clients to maximize their contributions to tax savings and retirement vehicles such as 401(k), 403(b), 457 plans, 529 plans, health savings accounts, simplified employee pension plans and Keogh plans. This year, high income earners who do not implement strategies to maximize their retirement and health savings plan contributions will be taxed on that lost benefit at a much higher rate.

Individuals and their tax advisers should revisit their decisions to contribute to a traditional versus Roth retirement plan. Distributions from Roth IRAs and Roth 401(k) plans are not subject to regular tax or the Medicare investment tax and, therefore, are a more attractive retirement savings vehicle for many individuals. However, if hovering around the threshold for the new Medicare tax, consider moving Roth contributions to a traditional retirement plan to create a tax deduction.

How will the tax increases impact planning for capital gains?

All capital gains are subject to the new 3.8 percent Medicare investment tax.  Although long-term capital gains still maintain their preferential rates, high income earners received a 5 percent rate increase on those long-term gains on top of the 3.8 percent tax. Even worse, short-term capital gains are also subject to higher ordinary income rates.

By working with your adviser, you can better manage your tax rates on capital gains. There are tax deferral mechanisms that should be considered, such as a Section 1031 exchange or an installment sale.

An installment sale will spread the gain over several tax periods in order to minimize or entirely avoid the Medicare tax on investment income. Taxpayers should also consider realizing losses on existing stock holdings, while maintaining their investment position by selling at a loss and repurchasing at least 31 days later or swapping it out for a similar, but not identical, investment.  

What other tax saving strategies should be discussed with your financial adviser?

In light of recent tax developments, it is important for individuals to work with their financial adviser to build a highly customized tax plan. Plans may include:

  • Strategies to avoid at-risk limitations on flow-through investments. If a loss has been incurred, make sure it’s deductible.
  • If self-employed, consider any capital expenditures that will be needed in the coming year. Favorable Section 179 deductions and bonus depreciation have been extended through the end of 2013 and can be used to minimize the impact of the new Medicare taxes.
  • Consider moving investments into tax-exempt vehicles, such as municipal bonds, to avoid the Medicare investment tax.

While it might seem as if it’s a bit early to start tax planning, right now is the most important time to think about taxes because it may be too late to enact some strategies in December.

Monic Ramirez, CPA, is a senior tax manager at Sensiba San Filippo LLP. Reach her at (408) 776-8900, ext. 5524, or [email protected].

For more tax planning tips, visit Sensiba’s blog.

Insights Accounting is brought to you by Sensiba San Filippo LLP

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