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:
If you would like to learn more about these strategies and how they can benefit your clients, please call our office.
Several significant changes to federal income tax laws went into effect in early 2013, including:
1. Raising the top tax bracket from 35% to 39.6%. In 2014, this top rate applies as follows:
2. Increasing the long-term capital gains rate on the top tax bracket from 15% to 20%
3. Applying a 3.8% surtax on the lesser of net investment income or modified adjusted gross income for individual taxpayers earning as follows:
4. Applying a 3.8% surtax on trusts and estates on the lesser of undistributed net investment income or adjusted gross income over $12,500 (in 2014)
This means that the top tax rate could be as high as 43.4% for certain taxpayers. Therefore, it is important to understand how these new laws impact you and what can be done to reduce your 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.
While you may be familiar with Charitable Remainder Trusts (CRTs) as an estate planning technique used to minimize estate taxes, CRTs are also effective in reducing income taxes under the right circumstances.
A CRT is a type of irrevocable trust that pays an annual distribution to one or more individual beneficiaries for a term of years, after which the balance of the trust passes to one or more charitable organizations.
The income tax deduction rules for CRTs are complex and the amount of the deduction is limited based on several factors, primarily an individual’s adjusted gross income, other charitable giving, and what type of assets are being used to fund the CRT. Aside from being able to take this limited income tax deduction over a five year period for the value of the property transferred into a CRT, a CRT can be used to reduce a client’s income tax bill as follows:
Planning Tip: Aside from having charitable intent, CRTs are for clients who have substantial investable assets that are expected to increase in value and the client will not need to rely on the income from the assets. If you have clients who fit this profile, call our office now so that we can help determine if any of these CRT strategies will benefit these clients.
Trustees of irrevocable, non-grantor trusts (such as Bypass Trusts and Dynasty Trusts) must take into consideration their fiduciary responsibilities and plan carefully to minimize the impact of the compressed trust income tax brackets (remember, the top 39.6% tax rate kicks in at only $12,500 of trust income in 2014) and the 3.8% surtax is likely to impact all or nearly all trust income.
Since trust income distributed to the beneficiaries is not taxed at the trust level, distributions may be made to beneficiaries who are not in a high income tax bracket and/or subject to the surtax. Of course, any distributions aimed at reducing a trust’s income tax liability must be made within the parameters established in the trust agreement and applicable state law.
With these limitations in mind, income-reducing strategies that Trustees should consider include:
Planning Tip: Trustees must weigh the tax benefits of making distributions or changes to a trust against the grantor’s intent, the needs of the current beneficiaries, and what will be left for the remainder beneficiaries. We can help your Trustee clients analyze their trust’s 2014 tax liability and evaluate their options for minimizing taxes.
Planning to reduce income taxes is a balancing act. The needs of the individual taxpayer or trust beneficiary must be carefully weighed against the overall tax savings. In addition, income, gains, losses, and tax brackets must be reviewed annually since the needs of the individual or beneficiary will change from year to year. We are available now to answer your income-tax planning questions and to work with you and your clients to reduce their income tax bills.