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Your Tax “Bucket List”


February 19, 2014

Written by Rick Huff

As a wealth/financial advisor with a CPA license, I am lumped with all CPAs when it comes to continuing education. Those with CPA licenses are required to have one of the highest number of continuing education hours in the professional industries – 40 hours a year. Obviously, one can be creative where to obtain those hours (Of course, most people assume CPA and creativity are oxy morons).

For years I have been hearing that the Personal Financial Planning conference in Las Vegas, sponsored by the American Institute of CPAs (AICPA) every January for financial advisors, offered one of the best technical sessions for continuing education.

I had never been to Las Vegas and my curiosity got the best of me. So, last fall I booked the conference, flight and hotel along with recording the promise to my wife that I would not take too much of our hard-earned cash and not spend too much time in the casinos.

Upon arriving, and as one might expect with tax/CPA nerds running the conference and attending, the sessions were heavily laden with deep and juicy tax planning.

The overarching theme of the conference, and the one I want to introduce briefly today, was tax bracket management (I will cover a number of other topics in subsequent columns).

Tax bracket management, as the name implies, is the shrewd and efficient manipulation of income and the resulting tax from intelligently managing one’s tax buckets. In years past whenever faced with a decision regarding a course of action, financial advisors and helpful CPAs would calculate their client’s marginal bracket and resulting tax hit fairly quickly. The process wasn’t tremendously difficult.

But that was the past when tax scenarios were two dimensional; we are now in a four dimensional tax universe —

  • Regular income tax
  • Alternative minimum tax (AMT) – this scheme has been with us for awhile
  • Net investment income tax (NIIT) – this adds another 3.8% onto your tax bill
  • The supertax – increases high income taxpayers to a 39.6% ordinary income and short-term capital gains rate PLUS a 20% maximum dividend and long-term capital gains rate

And as if above wasn’t enough, reduction of personal exemptions and itemized deductions for those with income over certain ceilings.

As some informed readers might correctly point out, these issues are only relevant for taxpayers as they near the trigger points, $250,000 for joint filers and $200,000 for single filers. That observation, while correct, might be extremely short sighted.

The “magic” (planning opportunities) is for the shrewd advisors who look forward and shift income to fill up the lower brackets now and in the near future in order to avoid the higher brackets being breached later, typically when required minimum distributions kick in along with Social Security income.

We’ll be exploring these opportunities in the coming months; I know you anxiously await the revelations.

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