Smart Business Magazine, June 2013

16 Smart Business Northern California June 2013 Taking charge of your taxes How corporate executives can navigate the 2013 tax minefield Theres a popular metaphor referred to as the boiled frog Simply put it says if you drop a frog in boiling water it will quickly try to escape But if you place a frog in tepid water thats slowly heated to a boil the frog will unresistingly allow itself to be boiled to death With the 2013 tax changes this metaphor may apply to taxpayers married and filing jointly with wages of taxable income of 223000 to 450000 says Geoffrey M Zimmerman CFP Senior Client Advisor at Mosaic Financial Partners Inc These households could see their federal marginal tax rate go from 28 to 455 percent Executives in this income range may soon find that they are in hot water with the heat on as the marginal tax rates ramp up fairly quickly Zimmerman says Smart Business spoke with Zimmerman about key tax changes as well as possible planning and investment strategies Why are 223000 to 450000 income earners unaware of the danger The increases come from moving up tax brackets new Medicare taxes of 09 percent on payroll and 38 percent on unearned income and the phase out of itemized deductions People earning more than 450000 have a good idea of whats coming but others arent as prepared for 1 to 2 percent increases that can add up For example if each spouse earns less than 200000 their employers arent required to withhold additional taxes from their paychecks for the 09 percent increase in Medicare But if their combined income pushes them over the 250000 threshold in household wages they may be surprised by an unexpected tax bill Additionally if you live in a state like California where state income taxes have gone up combined federal and state income tax rates can exceed 50 percent with capital gains rates reaching 33 percent or more What should these taxpayers be doing First and foremost dont let the tax tail wag the dog Tax strategies that look great in a silo may actually be detrimental to the big picture If your strategy puts you in a concentrated position or triggers undue risk then a sudden bad market movement can be worse than paying the taxes This is an opportunity for people to update their financial plan and review how the tax changes affect their goals Make sure your advisers are talking with one another and coordinating their work and advice How can some key planning strategies mitigate these increases Look for opportunities related to the timing of cash flows If you have a big income year where up to 80 percent of your itemized deductions might be lost defer some itemized deductions to the following year where the income might be lower In a low income year look at doing IRA to Roth conversions realizing capital gains and or accelerating income Take the initiative to engage in tax loss harvesting in taxable accounts which means you sell a security harvest the loss and then use that loss to offset a gain in either the current year or carry forward for use in future years This can be attractive particularly for investing styles that offer similar but not identical alternatives One example might be to sell an S P 500 index fund and reinvesting with a Russell 1000 index exchange traded fund to capture the loss while remaining invested Review the use of asset location strategies to improve tax efficiency Strategically place securities that produce ordinary income or that generally dont receive favorable tax treatment into a tax deferred account while putting tax efficient investments that generate long term capital gains or qualified dividends in taxable accounts Municipal bonds bond funds in taxable accounts now may be more attractive and you also can review opportunities to take advantage of above the bar deductions such as contributions to qualified plans like your pension 401 k etc For senior executives contribution to nonqualified deferred compensation arrangements may be more attractive particularly if a transition such as retirement is on the horizon With the help of good advisers who understand these moving parts and how they fit together executives can use these strategies and others to make better decisions to move toward the things that are really important to them GEOFFREY M ZIMMERMAN CFP Senior Client Advisor Mosaic Financial Partners Inc 415 788 1952 Geoff@ MosaicFP com Insights Wealth Management Finance is brought to you by Mosaic Financial Partners Inc FOLLOW UP If you feel like youre sitting in hot water call Geoff Zimmerman for a complimentary consultation INTERVIEWED BY JAYNE GEST INSIGHTS WEALTH MANAGEMENT FINANCE