The Wealth Counselor: Tax Laws

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Knowing the ins and outs of reducing income in view of the new tax laws will add value to your client relationships. In this issue you will learn how:

  • Charitable trust-based planning can be used by individual clients to reduce their taxable income.
  • Distributions, trust reformation or decanting, and investment shifting can be used by Trustee clients to reduce the taxable income of a trust.

If you would like to learn more about these strategies and how they can benefit your clients, please call our office.

A Quick Review of the Federal Income Tax Laws

Several significant changes to federal income tax laws went into effect in early 2013, including:

  • Raising the top tax bracket from 35% to 39.6%. In 2014, this top rate applies as follows:
    • Married couples filing jointly or qualifying surviving spouses with taxable income above $457,600
    • Heads of households with taxable income above $432,200
    • Married individuals filing separately with taxable income above $228,800
    • Single individuals with taxable income above $406,750
    • Trusts and estates with taxable income above only $12,500 
  • Increasing the long-term capital gains rate on the top tax bracket from 15% to 20%
  • Applying a 3.8% surtax on the lesser of net investment income or modified adjusted gross income for individual taxpayers earning as follows:
    • Married couples filing jointly or qualifying surviving spouses, $250,000
    • Married individuals filing separately, $125,000
    • Single individuals or heads of households, $200,000 
  • Applying a 3.8% surtax on trusts and estates on the lesser of undistributed net investment income or adjusted gross income over only $12,500 (in 2014)

This means that the top tax rate could be as high as 43.4% for certain taxpayers. That’s before taking into account any state income taxes, so depending on a person’s state of residence or a trust’s situs, the top tax rate could be even higher. Therefore, it is important to understand how the new laws impact your clients and what can be done to reduce their income tax liability.

Planning Tip:  Now is the time for high-income individuals and Trustees to begin looking at strategies to reduce their 2014 income tax bill. Each client’s tax situation must be evaluated individually since this type of planning is not one size fits all, or even most. We are here to discuss the options available to your clients for reducing their tax burden.

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