Tax Planning & Tax Law Change
Planning your taxes well before year-end is important for traders. Whether
it’s pre-paying state income taxes for an additional tax deduction
— without triggering the alternative minimum tax (AMT) or the 2013
Pease limitation — or accelerating other expenses and deferring
income and therefore taxes, it’s important to get a handle on trader
tax status, your trade accounting and other tax matters. Obama-era tax
hikes on the upper income start in 2013, so try to avoid those, too.
Most tax planning articles in the mainstream media focus on tried-and-true
strategies — what I call “plain vanilla” strategies.
We focus on unique tax planning strategies that affect business traders
and investment managers, including trader tax status (business treatment),
tax treatment elections, Roth conversions, avoiding wash sale loss deferrals,
managing tax rate brackets, special strategies with entities, maximizing
retirement plan deductions and reducing self-employment, payroll and new
Medicare taxes on unearned income.
2013 TAX CHANGES
Congress forged a last-minute fiscal cliff decision — The American
Taxpayer Relief Act — before the lame-duck session expired on Jan.
3. Unfortunately, no one could plan taxes with certainty before year-end.
Now that the deal has been reached, hopefully we can make better tax planning
moves in 2013.
Fiscal cliff news dissected. The good news
is Congress and the President made the Bush-era tax cuts and rates permanent
for taxpayers, excluding the top 2% with incomes over $300,000 (joint
filers) and $250,000 (single filers). (To get a good handle on the amounts
due, use calculators like this one: http://calculator.taxpolicycenter.org/.)
If you thought the thresholds were $450,000 and $400,000, you’re
not alone. Congress and the media focused on the top tax rate returning
to the Clinton-era rate of 39.6% only on incomes over $450,000 for couples
and $400,000 for individuals.
Besides adding a new top tax rate of 39.6%, the legislation included Speaker
Boehner’s original offer to raise revenue through reducing tax expenditures.
Starting with incomes over $300,000 (joint) and $250,000 (single), the
act brings back old tax law for Personal Exemption Phaseout (PEP) and
Pease provisions. The Pease provision eliminates itemized deductions up
to 80% on incomes over those levels, and PEP eliminates exemptions. In
high-tax states, it can raise families’ official 33% tax rate to
an effective rate of 38%......
The fiscal-cliff deal made the qualifying dividends and long-term capital
gains tax rates permanent. It raised the Bush-era 15% qualifying dividends
and long-term capital gains tax rate to 20% when incomes exceed $450,000/$400,000.
(The higher 20% tax rate only applies to qualifying dividends and long-term
capital gains income that exceed the threshold.)
More tax reform is on the way. Don’t
get too comfortable with tax planning certainty for 2013. Before signing
the fiscal cliff legislation, President Obama promised he will try to
raise more tax revenue as part of a grand bargain to reform taxes, spending
and entitlement programs..........
NEW MEDICARE TAX
The ObamaCare 3.8% Medicare tax on unearned income starts in 2013 for
taxpayers with AGI over $250,000 (married) and $200,000 (single). We explain
how these new rules work in detail, focusing on what affects traders and
investment managers in particular. One key point is that the tax applies
on net investment income, so traders can reduce it by deducting all their
trading and investment expenses, including fees or salaries paid to them
and their spouses for administration services.
While administration fees or salaries trigger 3.8% Medicare taxes on earned
income, we offer strategies to avoid Medicare taxes on both earned and
unearned income: Use an S-corporation to receive the administration fees
first, then reduce the SE tax with reasonable compensation and pay a smaller
fee to Schedule C for the AGI deductions (retirement plan and health insurance
premiums). For more on the new Medicare tax, see Appendix C.
This is an excerpt from chapter 9 from Green’s
2013 Trader Tax Guide • Copyright © 2013