EDUCATION CENTER
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

 

 

     

See June events

Highlighted Recent Recordings:
*Tax Planning for Net Investment Income
*A Trading Business Entity Is Better Than A Sole Proprietorship
*Trader Tax Benefits & Elections To Make By April 15
* 2013 Trader Tax Law: What You Need to Know NOW
*2012 Tax Extensions & Section 475 MTM Elections
*2012 Trader Tax Preparation Examples & Tips
*Active Forex Traders Benefit From Trader Tax Status
*Tax Benefits from Trading Section 1256 Contracts
*How Traders Deduct Education
*Updates: Trader Tax, Form 8949 vs. 1099-B problems, & Forex
*Taxes for Options Traders
*Best Entities for Traders and Investment Management
*Launching an Incubator Hedge Fund

Trader Tax

Tax Tools

Highlights:

May 5: Petition on RallyCongress.com for the Net Investment Tax Read More

May 1: The IRS needs to fix their proposed regulations for the Net Investment Tax Read More

March 31: PFG investors can deduct theft losses on 2012 tax returns with Rev. Proc. 2009-20 safe harbor relief. That’s great news! Read More

March 20: Extensions & Section 475 MTM elections are due by April 15 Read More

March 7: MF Global & PFG Best deposit losses have nuanced tax treatment Read More

March 5: Caution, downloading securities Form 1099-Bs into TurboTax often leads to incorrect tax filings Read More

Feb. 5: Green’s 2013 Trader Tax Guide is our best ever Read More

Jan. 5: Post fiscal cliff tax planning for traders Read More

Dec. 7: New entities effective Jan. 1, 2013 reap many tax benefits Read More

Dec. 4: Investors in hedge funds depend on “assurance” from quality independent CPA firms Read More

Nov. 20: Cost-Basis Reporting Problems and Solutions Read More

Sept 5: High-income traders and ObamaCare’s 3.8% Medicare tax Read More

Aug 22: Proprietary trading Read More

Jun 20: The Best Entities for Traders and Investment Management Businesses Read More

Jun 20: Tax Benefits from Trading Futures & Other Section 1256 Contracts Read more

GreenTrader blog archive, Forbes blog, Benzinga blog.

 




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