Probate & Trust Law Section Conference Manual ... - Minnesota CLE

Suppose, for example, that a married couple with an adjusted gross income of $300,000
in 2013 wants to know the effective tax rate on an additional $20,000 of gross income.
Although the couple’s marginal tax rate on the extra $30,000 would be 33% under the 2013 tax
tables, the $30,000 excess will also cause the couple to lose $900 in itemized deductions. That
effectively increases their taxable income by $900, resulting in $300 more tax (33% x $900). The
total tax on the extra $30,000 would thus be $10,900, an effective rate of 36.33%. It may well
be the extra tax does not deter the couple from earning the additional income, but most clients
would likely want to be made aware of the added cost.
5. Planning for the Wealthy
In addition to the net investment income tax and the application of the overall limitation
on itemized deductions, wealthy taxpayers have to deal with the return of the 39.6% bracket
and a less preferential tax rate of 20% on adjusted net capital gain. 6 While taxes are just one
factor to consider in making and managing investments, of course, ATRA has made taxes a
more important factor. Accordingly, some of the following strategies may be worth considering.
First, clients may wish to invest more heavily in tax‐exempt municipal bonds, keeping in
mind that interest from some municipal bonds is a preference item for purposes of the
alternative minimum tax purposes and that some states impose income tax on the interest
from municipalities outside of the state.
Second, clients may want to harvest capital losses in order to offset gains that could be
taxed at 23.8%. This is consistent with the advice we were giving clients at the end of 2012,
when we told them to accelerate capital gains into 2012 (to be taxed at 15% instead of the
23.8% rate we were expecting for 2013) and to defer capital losses into 2013 and beyond. 7
Third, clients have more incentive to channel tax‐challenged assets into tax‐deferred
vehicles. While municipal bonds and stocks held for long‐term growth may be perfectly fine
inside of trusts taxed as separate entities, taxable bonds and mutual funds with high turnover
are better‐suited for pension plans, individual retirement accounts, and tax‐deferred annuities.
Fourth, working clients should keep making maximum contributions to qualified
retirement plans. The more that passes to the plan, the lower the client’s adjusted gross
income (and, hence, taxable income).
6 As before, of course, other components of net capital gain are taxed at less preferential rates. So‐called
“unrecaptured section 1250 gain” continues to be taxed at 25% or the taxpayer’s marginal rate, whichever is less.
Similarly, “collectibles gain” and “section 1202 stock gain” continue to be taxed at 28% or the taxpayer’s marginal
rate, whichever is less.
7 It’s nice when our advice proves to be correct, isn’t it?
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