With more folks "riding in the wagon" than "pulling the wagon" these days, those pulling the wagon are having to pull harder with higher tax income tax rates. Remember: all taxation is political. While the government is devouring more revenue from the economy and seeking to "spread around the rest," there are some practical steps "wagon pullers" need to mind to keep what they can.
But first, consider the following:
Did you know the top bracket is 39.6 percent for singles making $400,000 and marrieds filing jointly making $450,000? In addition, did you know there is a 3.8 Medicare surtax on net investment income if modified AGI is more than $200,000 for singles and $250,000 for their married counterparts?
But wait, there is more.
Did you know there is a 0.9 percent Medicare payroll withholding tacked on to the incomes of people earning $200,000 if single and $250,000 if married?
"The trouble with Socialism is that eventually you run out of other people's money" — Margaret Thatcher
I confirmed this quote on Snopes.com.
I digress. [What else is new, if you are a regular reader of this blog.]
So, what is a "taxpayer" to do?
According to a recent post on cnbc.com, titled Tax planning tips for high-income earners,” tax planning is better done looking ahead three or five years. For example, if you see a trend, such as an increase or reduction in your income, you can alter your deductions or deferrals.
Watch out because investment income is taxed as ordinary income. Your returns could bump you into the higher categories if you are right on the edge of a bracket fault line.
On the other hand, to avoid adding to your tax burden, be mindful to leverage tax-sheltered accounts—including 401(k) plans and IRAs. Why? When you place funds in a retirement account, then there is no taxation owed until the funds are withdrawn.
Even better, in the case of Roth IRAs no tax will ever be owed after the contributions are made! Sweet.
A higher estate-tax exemption, currently at $5.43 million per taxpayer in 2015, means fewer people pay the federal estate tax now. That is a bit of good news. Consequently, some experts are reconsidering their traditional advice.
A former rule of thumb held that you should give away as much as you can during your lifetime. However, in the times of political and economic uncertainty, you may need your resources for medical expenses and even later in life care.
From an income tax and estate planning perspective there can be some real advantages to retaining appreciating assets inside your estate? Why? Because your heirs would enjoy a stepped-up basis when they inherit.
For instance, if an asset grows from $100 to $1,000 during your lifetime, then the basis will reset for your heirs when they inherit it. The asset will have a new basis - the value on your date of death.
When the heir sells the stock, his or her capital gains tax will be limited to any increase in value after your date of death. Alternatively, if you were to gift the asset to the same heir during your lifetime, then his or her basis is your original basis. Not good.
If you want to keep more of your hard-earned assets and those you have inherited through the wise stewardship of your family line, then consult with an experienced estate planning attorney.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: cnbc.com (January 28, 2015) “Tax planning tips for high-income earners”