The Wall Street Journal
Weekend Investor – Your Money – November 30, 2013
How To Lower Your 2013 Tax Bill. New hidden tax hikes will hit many people this year. Here’s how to lessen the blow.
By Laura Saunders
You might think that tax planning would be easier this year. You could be wrong.
On New Year’s Day, Congress finally agreed to settle many unresolved issues, raising taxes for most Americans. But only one change was simple: the end of a two-percentage-point cut in Social Security taxes, which is costing wage earners up to $2,274.
Most of 2013’s other tax increases are less broad-based and more complicated.
This year’s code includes two new taxes, a new top income-tax rate, a new top rate on long-term capital gains and dividends, a new inflation adjustment to the alternative minimum tax, or AMT, and two revived tax-benefit “phaseouts.”
What to Know
The Net Investment Income Tax. Passed by Congress in 2010 to help fund the health-care overhaul, the NIIT is an entirely new levy this year of 3.8% on the net investment income of most couples above a threshold of $250,000 of adjusted gross income, or AGI ($200,000 for single filers).
Personal Exemption Phaseout. This benefit limit, also known as PEP, returns in 2013 after an absence of three years, with some differences.
Pease limit on itemized deductions. This hidden increase, named after a former congressman from Ohio, also returns this year.
Medicare payroll-tax increase. Taxpayers will owe an extra 0.9% of Medicare tax on wages above $250,000 of adjusted gross income ($200,000 for singles). This comes on top of the 2.9% Medicare tax for all workers, which is split evenly between employer and employee.
Maximize medical and miscellaneous deductions. Both are subject to such high hurdles that taxpayers often have a hard time claiming them unless they strategize, say by bunching expenses from more than one year to claim them at once.
Use an expiring tax break. This is the last year to take advantage of more than a half-dozen popular breaks, unless Congress extends them next year.
Make annual gifts. The federal estate-and-gift-tax lifetime exemption is now $5.25 million per individual, and it will rise to $5.34 million next year.
Comments November 30, 2013
Should you pay a higher tax rate on your income simply because you earn a higher income? If you work longer hours to earn more income, is your time worth less than someone else’s time? U.S. tax law implies that your time is worth less as your income rises. Since income tax rates are based on a graduated scale, the more income you earn the higher your tax rate on that income. Does U.S. tax law reward us for earning less and punish us for earning more? Without careful tax planning the answer is yes. With careful tax planning the answer is no.
Sheltering income is one of the most powerful weapons available to battle the new, higher tax rates. Simply maximizing contributions to 401(k), 403(b) and 457(b) retirement plans can shelter your income, reduce your income tax rate and reduce your income taxes. As an added incentive, many employers will match your contributions and/or provide profit sharing.
Small business owners, including sole practitioners, can offer defined benefit pension plans, SEP IRA and SIMPLE IRA retirement plans. Note: a SEP IRA can be established as late as the April 15, 2014 tax filing deadline (including any extensions). Listed in order of maximum possible income sheltering, each can reduce your income tax rate and reduce your income taxes.
Fortunately, careful tax planning can turn the tables to your advantage. Utilizing the tax shelters discussed above can result in a lower tax rate and lower taxes than someone earning the same level of income. Reap double the rewards by earning more income and sheltering more income.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.