“We used to practice in a two-dimensional system, but now must practice in a four-dimensional world,” says Bob Keebler, a top educator of accounting and legal professionals on taxation of UHNWIs.
Keebler says year-end tax planning for UHNWIs has long required consideration of the Alternative Minimum Tax (AMT) as well as ordinary income tax rate — two dimensions. Now, however, tax minimization is a four-dimensional equation. The new 3.8% surtax, which raises the top tax rate on income from 39.6% to 43.4%, must be considered as well as a new “super-bonus” tax on couples with more than $450,000 of AGI ($200,00 for singles), that adds a fourth dimension lifting some high-income earners inot the 39.6% tax bracket and higher capital gains tax rate.
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Likening the tax situation to when Major Leage Baseball instituted the designated-hitter, Keebler says, the financial advisors who will win most with their clients and prospects are those who adjust quickest by learning the new rules of the tax game.
Some additional bits of tax wisdom Keebler covered:
- Couples with more than $1.6 million of income lose all their itemized deductions, which are subject to a phase-out starting on couples with more than $450,000.
- Californians state income taxes of 13% or New York income tax of 10% get lopped on top of the higher federal brackets now imposed on UHWNIs, bringing effective income tax rates above 50% for the first time since the 1980s.
- An Obama budget proposal would require the “average cost” method of tax lot accounting to be applied in securities sales and investors would no longer be allowed to choose the tax lots they wish to sell, removing a neat way some advisors add value.
- Bracket management requires careful attention
- Converting mutual funds and then recharacterizing them later based on performance is a brilliant strategy (video below)
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