New tax act could cause you to owe more income tax. What do you do if you do not have enough money to pay your income taxes for 2013 and previous years?

What are the effective strategies for high bracket people to

manage with the new tax rules?

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

First you need to make sure to keep current on your estimated income taxes and withholdings!

 

Second, you need to know what the new rules that could increase your income taxes!!  According to the American Taxpayer Relief Act of 2012, it forbids higher taxes for many taxpayers. Unfortunately, in 2013, the taxpayers in the top two tax brackets may experience an increase if they don’t manage the matter cautiously. Well, in this year, the upper income taxpayer may face the pinch in the pocket from three areas.

Here are the three major areas where the higher bracket people may get pinched in 2013:

 

  • Tax bracket:

As a matter of fact, the top tax bracket rises to 39.6% and it’s applicable for the income exceeding $400,000 for single taxpayers and $450,000 for couples. Well, you need to know that the tax brackets are determined on the basis of the taxable income after all deductions and not Adjusted Gross Income (AGI).

  • Phase out deduction:

Unfortunately, the phase-out at itemized deduction and personal exemption is again implemented. As a matter of fact, the phase-out for itemized deductions lower most of the itemized deductions by 3% on income exceeding an AGI threshold. Well, the AGI threshold in ATRA12 is $250,000 for single taxpayers and $300,000 for married couples. According to the ATRA12, the personal exemptions phase-out (PEP) reduced personal exemptions by 2% of the total exemptions for each $2,500 income exceeding the AGI threshold.

  • Obamacare Taxes:

The tax is levied to the smaller amount of a taxpayer’s net investment income or modified adjusted gross income (MAGI). Well, the threshold for single taxpayer is $200,000 and $250,000 for married taxpayers filing jointly. According to the new tax rule, the distributions from qualified retirement accounts are not subjected to the tax. But income from non qualified deferred annuities are considered as investment income and subjected to tax. Some of the other taxable investment income are passive rental income, royalties, other passive activity income. Some of the non taxable income are wages, municipal bond interest, life insurance proceeds, social security & veterans benefits and sale of a principal residence.

 

Effective strategies to lower the impact for higher bracket taxpayer:

1. If you’re subjected to pay extra tax, then you can move some of the investments to minimize the impact of taxes. Before you start investment, make sure your investments generating revenue are held in the tax deferred account. Well, the income from the municipal bonds is exempt from tax and you can keep in a taxable account. Another way you can lower the impact due to the recent changes in the tax law, for instance passively managed stock funds are tax efficient and should also be held in a taxable account.

2. Tax free municipal bond market is considered to be a great option if you’re planning to protect your income from taxation. The interest on the Muni bond is exempt from the Federal income tax as well as state income tax of the state from where it is issued.

Well, states do not tax federal government bond interest and the federal government does not tax interest of state and local government issues. Therefore, you can invest in Municipal bond as the interest is not subjected to the new 3.8% Obamacare tax. Your other additional advantages like the interest is excluded from AGI and the phase-out of deductions.

3. Start contributing in the employer sponsored plan as you can protect your income as well as lower the AGI, especially for the high income taxpayers. The contribution limit for the employees who participate in 401k as well as the federal government’s Thrift Savings Plan increased from $17,000 to $17,500. The catch-up contribution limit for employees aged exceeding 50 years participate in 401(k) and the federal government’s Thrift Savings Plan remained unchanged at $5,500.

4. Remember, investing in life insurance in 2013 can be beneficial as the tax treatment of life insurance is unchanged in ATRA12. Another important point is that the beneficiaries have secured income after the demise of the policy holder. Some of life insurance policies can function as tax-preferred investment vehicles, so you need to acquire more information.

 

Therefore, you can consider the above mentioned effective strategies to shelter your income, especially if you come under the high bracket. But if you still owe too much tax and incur overwhelming tax debt, then consider opting  for debt resolution services.  Our firm cannot endorse any service but we want you to be aware that there are services that may be able to help you!

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com