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Tax Planning.

The Importance of Tax Planning

Careful planning throughout the year can assist you in reducing the taxes you pay – as well as help you achieve your financial goals. This brief guide provides a basic overview of some of the tax rates, credits, deductions and related considerations that may apply to you.

Income tax planning should not be done in isolation, but instead should be driven by your overall financial goals and integrated with your total financial plan. By developing and implementing appropriate strategies to lessen or shift current and/or future tax liabilities, you can improve your prospects of meeting both long- and short-term objectives. For example, accurately projecting your income taxes can help you determine the cash flow available to you in the coming year.

Keep in mind that tax laws are often complex and frequently change. As a consequence, you should be sure to consult the appropriate professional before making investment and/or tax decisions.


Year-End Considerations

While year-round tax planning is important, you may find extra benefits by gathering all your tax-related facts as the year ends. You may, for example, have a clearer picture of your capital gains and losses, as many mutual fund companies issue distribution estimates by mid-December. The end of the year is a fine time to:

  • Examine your portfolio’s asset allocation
  • Rebalance your portfolio, if warranted
  • Assess holdings (Are they performing as expected?)
  • Add up tax-loss harvesting possibilities
  • Max out contributions to 401(k)s or other tax-advantaged retirement accounts
  • Make last-minute charitable donations
  • Pay deductible taxes for 2013 early, if it helps reduce adjusted gross income
  • If the alternative minimum tax applies to you, take AMT-appropriate actions


2013 Income Tax Changes

In early January, the American Taxpayer Relief Act of 2012 was passed by Congress and signed by the president in an effort to avoid the “fiscal cliff.” The act, referenced herein as ATRA 2012, essentially makes permanent the lower Bush-era tax cuts for all but certain high-income taxpayers, and extends certain small-business-friendly provisions, including small-business expensing and bonus depreciation.

The new law makes the estate and gift tax laws permanent, and sets the exemption amount for 2013 at $5.25 million (indexed for inflation) per person for estate, gift and generation- skipping taxes. ATRA 2012 did not extend the 2% reduction in payroll taxes (the “payroll tax holiday”), and therefore taxes will increase for most all taxpayers in 2013.

For high-income taxpayers, the 39.6% bracket was reinstated and the maximum long-term capital gains tax was raised back to 20%. The maximum rate for qualified dividends is also 20% for these taxpayers. The 39.6% bracket is indexed for inflation and begins at $450,000 for married taxpayers filing jointly, $425,000 for taxpayers filing as head of household, and $400,000 for taxpayers filing as single filers.


The 3.8% surtax on “unearned income” applies to individuals, trusts and estates. “Unearned income” is defined as investment income such as income from interest, dividends, annuities, royalties, capital gains and other passive income. Two conditions must be met for the 3.8% surtax to apply. First, the taxpayer must have investment income, and second, the taxpayer’s modified adjusted gross income (MAGI) must exceed the limits below, which are not indexed for inflation:

  • $250,000 for taxpayers filing jointly
  • $125,000 for taxpayers filing married filing separately
  • $200,000 for other taxpayers

For purposes of the 3.8% surtax, the MAGI limitation is simply the taxpayer’s adjusted gross income (AGI) plus any excluded net foreign income. In general terms, AGI is the number at the bottom of the first page of a taxpayer’s 1040 (line 37).

If those two conditions are met, then the 3.8% surtax applies to the amount of the investment income, or if smaller, the difference between the taxpayer’s MAGI and the limits listed above. For example, if a single taxpayer has $10,000 of dividend income and MAGI of $205,000, then the 3.8% surtax applies to $5,000. If the same taxpayer had MAGI of $211,000, the 3.8% surtax would apply to $10,000.

The 3.8% surtax does not apply to distributions from tax-favored retirement plans such as IRAs or qualified plans, although distributions from taxfavored retirement plans may increase a taxpayer’s MAGI over the limits discussed above and thereby potentially expose investment income to the 3.8% surtax. In general terms, the 3.8% surtax does not apply to active trades or businesses conducted by a sole proprietor, S corporation or partnership, or to the gains and losses on the sale of active trades or businesses. However, working capital is not treated as being part of an active trade or business for purposes of the 3.8% surtax.

For 2013, and thereafter, an additional 0.9% Medicare tax will be imposed on wages of employees and on earnings of self-employed individuals. The 0.9% Medicare tax will apply to wages and self-employment earnings above the limits below, which are not indexed for inflation:

  • $250,000 for taxpayers filing jointly
  • $125,000 for taxpayers filing married filing separately
  • $200,000 for other taxpayers

The 0.9% Medicare tax applies to employees, but not to employers. For joint filers, the tax applies to the spouses’ combined wages. For self-employed individuals, the 0.9% tax is not deductible.

Estate Tax
Under ATRA 2012, the estate, gift and generation- skipping tax exemption equivalent amount is unified for all three transfer taxes and is permanently extended and indexed for inflation. The exemption amount for 2013 is $5,250,000. The maximum estate and gift tax rate in 2013 will be 40%.

ATRA 2012 also extended the concept of “portability” as it existed in 2011 and 2012, meaning that a surviving spouse may receive a deceased spouse’s unused exemption amount if the appropriate elections are made with the IRS.

For 2013 the unified credit, which is the amount of tax credit used to determine the exemption equivalent amount, is $2,045,800 for an exemption equivalent amount of $5,250,000.

For 2013, the annual gift tax exclusion will be $14,000 per person. The annual exclusion gift for non-citizen spouses will be $143,000.

The estate and gift tax rate table is depicted below. The generation-skipping transfer tax (GSTT) rate is the highest marginal estate tax rate of 40%.

* Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Income Tax Rates

Taxable income is income after all deductions, including either itemized deductions or the standard deduction, and exemptions.


Married Taxpayer Joint/Surviving Spouse
Taxable Income Pay Percentage
of Excess
Of Amount Above
Less than $17,850 N/A 10% $0
17,850 – 72,500 $1,785.00 15 17,850
72,500 – 146,400 9,982.50 25 72,500
146,400 – 223,050 28,457.00 28 146,400
223,050 – 398,350 49,919.50 33 223,050
398,350 – 450,000 107,768.50 35 398,350
More than 450,000 125,846.00 39.6 450,000
Single Taxpayer
Taxable Income Pay Percentage
of Excess
Of Amount Above
Less than $8,925 N/A 10% $0
8,925 – 36,250 $892.50 15 8,925
36,250 – 87,850 4,991.25 25 36,250
87,850 – 183,250 17,891.25 28 87,850
183,250 – 398,350 44,602.25 33 183,250
398,350 – 400,000 115,586.25 35 398,350
More than 400,000 116,163.75 39.6 400,000
Head of Household
Taxable Income Pay Percentage
of Excess
Of Amount Above
Less than $12,750 N/A 10% 0
12,750 – 48,600 1,275.00 15 12,750
48,600 – 125,450 6,652.50 25 48,600
125,450 – 203,150 25,865.00 28 125,450
203,150 – 398,350 47,621.00 33 203,150
398,350 – 425,000 112,037.00 33 398,350
More than 425,000 121,364.50 39.6 425,000



Personal and Dependency Exemptions

Exemptions per person: $3,900

The personal exemption amount for 2013 is $3,900 per taxpayer, taxpayer’s spouse and taxpayer’s dependents. ATRA 2012 brings back the phase out of the personal exemption (PEP) for taxpayers whose AGI is over certain threshold amounts.

The PEP reduces the taxpayer’s personal exemptions by 2% for every $2,500 (or fraction thereof) over the threshold amount. For married taxpayers filing separately, the reduction is 2% for every $1,250 over the threshold amount. There is no limit in the PEP reduction, and a taxpayer may lose all of his or her personal exemptions. The threshold amounts will be indexed for inflation after 2013.

Standard Deductions*

Head of Household
*Extra Deduction if Blind or over 65
Single or head of household
All other statuses


Key Tax Rules

Kiddie Tax Rules
The Kiddie Tax rules require the unearned income of a child or young adult be taxed at the greater of the child’s or parents’ marginal tax bracket once the unearned income exceeds $2,000. Under the Kiddie Tax rules, the first $1,000 in unearned income is not subject to tax. The next $1,000 of unearned income is taxed at the child’s rate (typically 10%). Then, any unearned income of more than $2,000 is taxed at the parents’ marginal rate. The Kiddie Tax rules apply to unearned income of the following:

  • A child under age 18,
  • An 18-year-old whose unearned income does not exceed one-half of his or her support, and
  • A 19- to 23-year-old full-time student whose income does not exceed one-half of his or her support.

Individual Dividend Rates

Individual Dividend Rates
Maximum Rate Rate for Qualified Dividends*
Taxpayers Above the 15% Bracket 35% 15%
Taxpayers in the 15% Bracket and Below 15% 0%

*”Qualified dividends” generally means dividends received during 2011 from domestic corporations. The investor must own the stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date. These periods are doubled for preferred securities.

Capital Gains Tax Rates

Description of Capital Gains Tax Rates
Holding Period Maximum Rate* Effective Maximum Rate with 3.8% Surtax
Assets Held One Year or Less 39.6% 43.4%*
Assets Held More than One Year and Sold by
Individuals in the 39.6% Tax Bracket or Above
20% 23.8%*
Assets Held More than One Year and Sold by Individuals in the 25% to 35% Tax Bracket 15% 18.8%**
Assets Held More than One Year and Sold by
Individuals in the 15% Tax Bracket or Below
0% 0%

*The additional 3.8% Medicare surtax will apply to these taxpayers.

**The additional 3.8% Medicare surtax may apply to these taxpayers.


Individual Retirement Accounts

Generally, contributions are fully deductible unless you or your spouse are covered by a workplace retirement plan, in which case the following deduction phase-outs apply.

Traditional IRA: Deductability of Contributions
Status Modified Adjusted Gross Income Deduction
Married Filing Jointly* $0 – 95,000
95,000 – 115,000
More than 115,000
$5,500 Maximum
Single $0 – 59,000
59,000 – 69,000
More than 69,000
$5,500 Maximum
For Noncovered Spouse** $0 – 178,000
178,000 – 188,000
More than 188,000
$5,500 Maximum

*If neither individual or spouse is covered by a plan, you can deduct up to $5,500 each or MAGI, whichever is less.

**Applies to individuals whose spouses are covered by a workplace plan but are not covered themselves.

Roth IRA: Eligibility of Contributions
Contributions made to a Roth IRA are not deductible, unlike contributions made to a traditional IRA, and there is no age restriction on making contributions. An individual may contribute up to $5,500 to the Roth IRA, subject to income phase-out limits.

Status Adjusted Gross Income Deduction
Married $0 – 178,000
178,000 – 188,000
More than 188,000
$5,500 Maximum
Single $0 – 112,000
112,000 – 127,000
More than 127,000
$5,500 Maximum

Catch-Up Contributions
If you have either a traditional or a Roth IRA and attain age 50 or older during the tax year, an additional $1,000 may be contributed.

IRA & Roth Contribution
Maximum Contribution Catch-up Contribution
$5,500 $1,000


Trust and Estate Income Tax Rates

If taxable income is: Your tax is:
Not over $2,450 15% of taxable income
Over $2,450 to $5,700 $367.50 + 25% of the excess over $2,450
Over $5,700 to $8,750 $1,180 + 28% of the excess over $5,700
Over $8,750 to $11,950 $2,034 + 33% of the excess over $8,750
Over $11,950 $3,090 + 39.6% of the excess over $11,950

Education Planning

Education Credits

American Opportunity Credit (formerly Hope Credit)* Up to 100% of the first $2,000 and 25% of the next $2,000 to a maximum of $4,000 of expenses; maximum credit is $2,500. Reduction for MAGI between $80,000 – $90,000 for single filers and $160,000 – $180,000 for joint filers.
Lifetime Learning Credit Up to 20% of the first $10,000 (per taxpayer) of qualified expenses paid in 2013. Reduction for MAGI between $53,000 – $63,000 for single filers and $107,000 – $127,000 for joint filers.
Qualified Tuition and Related Expenses This is an “above-the-line” deduction. $4,000 for a taxpayer whose AGI does not exceed $65,000 for single filers and $130,000 for married filing joint, and $2,000 for taxpayers whose AGI does not exceed $80,000 for single filers and $160,000 for married filing joint. For taxpayers over the $80,000/160,000 AGI limit, no deduction is allowed.


*Can be claimed for up to four years.

Student Loan Interest Deduction

Maximum Deduction $2,500
MAGI Phase-Outs
Married Filing Jointly
$125,000 – $155,000
$60,000 – $75,000


Tax Credits

Annual Exclusion for Gifts

2013 $14,000


The information provided in these web pages is based on internal and external sources believed reliable; however, the accuracy and completeness of the information is not guaranteed and the figures may have changed since the time of printing. Examples are hypothetical illustrations and not intended to reflect the actual performance of any particular security. Please consult your tax advisor for questions relating to your individual situation.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period.