A Tale of Two Couples

As always, savvy planning in the last quarter of the year can pay off in lower taxes next year when you file your return. Some tax planning is fundamental: most people will benefit by accelerating tax deductions into 2014, while deferring income into 2015. Yet, there is now a distinct divide between taxpayers reporting high income and all other Americans. Generally speaking, as a result of recent legislation, if your annual income is over $200,000 you must cope with far more tax complexity than other taxpayers face.

Example 1: Wendy and Victor Taylor have $120,000 of income this year, before any deductions. They are in the 25% federal income tax bracket, so tax deductions will save them 25 cents on the dollar and they’ll owe 25 cents per dollar on any additional income they’ll report, up to the top of the 25% tax bracket. The Taylors will owe 15% tax on qualified dividends (most dividends are qualified) from stocks and stock funds as well as 15% on long-term capital gains.

Example 2: Sharon and Rick Palmer have combined taxable income that runs over $600,000 per year, which puts them into the top 39.6% tax bracket this year. (That rate applies to married couples with taxable income over $457,600 in 2014.) As top bracket taxpayers, the Palmers owe 20% on qualified dividends and long-term gains.

The Palmers also may owe a 3.8% net investment income tax (NIIT), sometimes called a Medicare surtax, because their modified adjusted gross income (MAGI) is over $250,000 on a joint tax return. This couple also will lose some tax benefits from their exemptions and itemized deductions because their AGI is over $305,050 this year. Moreover, the Palmers will owe an extra 0.9% in payroll tax on earned income over $250,000.

The income thresholds will vary for single filers and for those who choose another filing status but the principle is constant. High-income taxpayers have to deal with more tax code provisions and larger tax payments. All taxpayers can benefit from year-end planning, but those who fall into any of the “high-income” categories in today’s tax law have the most to gain from timely actions.

In 2014, many high income taxpayers were flabbergasted to see how much they owed in tax on their 2013 returns, versus their 2012 tax obligation. The new wrinkles that have been added to the tax code have made a huge difference for many people. Forethought and planning could have saved substantial amounts. It’s too late now to save on your 2013 tax bill but you still have time,until December 31, to take actions that will reduce the tax you’ll owe for 2014.

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