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WEALTH
Tax Considerations in
Income Shifting BONNIE RAINEY, MANAGING DIRECTOR AND REGIONAL TRUST EXECUTIVE, U.S. TRUST
WITH TAX DAY RIGHT AROUND THE CORNER, WHAT ARE 3 TIPS YOU WOULD OFFER?
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Tax planning is a yearlong pursuit. You should start planning for 2015 early in the year.
Prepare a multi-year income tax projection to determine if it may be beneficial to incur gains or take deductions in one year versus another. You don’t want the “tax tail to wag the investment dog,” however, viewing your investment strategy in tandem with your income tax situation is a prudent approach.
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Understand the various tax thresholds and how they may impact your personal tax situation.
WHAT FACTORS IN TODAY’S FINANCIAL CLIMATE SHOULD TAXPAYERS CONSIDER WHEN TAX PLANNING? Income tax planning becomes even more important in the increased income tax environment. For individuals that have Modified Adjusted Gross Income (MAGI) close to the threshold limits, proper planning may reduce their income taxes. For example, married couples with MAGI below $250,000 are not subject to the additional 3.8 percent Medicare Tax. Individuals looking to reduce their MAGI should consider the following approaches. Couples should make sure they have made maximum tax-deferred contributions to qualified retirement plans and if they are 50 or older, use the catch-up provisions as well. Next, harvest losses to offset capital gains. Finally, consider utilizing stocks with unrealized gains to make charitable contributions rather than selling.
IS INCOME SHIFTING STILL RELEVANT IN TODAY’S TAX ENVIRONMENT? The main goal of income shifting is to generate tax savings. If you advise your children or grandchildren on their annual income tax return, you should be aware of recent changes to the tax laws pertaining to income shifting. To prevent parents from shifting incomeproducing assets to their children with lower-tax brackets, Congress enacted the Tax on a Child’s Investment Income. Even before this income tax, a portion of your child’s unearned income could be taxed at your highest rate in certain situations. Now, adding your child’s net unearned income onto your tax return can increase your exposure to the 3.8 percent surtax. Rather than including the child’s income on the parent’s income tax return, taxpayers can choose to prepare a separate income tax return for the child which would allow the child to take advantage of their own threshold for this tax. If you or your children are trust beneficiaries and are in a lower tax bracket due to lower earnings, shifting income to one or more beneficiaries can produce considerable savings. Because every financial situation is unique, you should always consult a certified accountant or tax attorney before making any adjustments to your overall tax strategy.
This content represents thoughts of the author and does not necessarily represent the position of Bank of America or U.S. Trust. This article is designed to provide general information about ideas and strategies. It is for discussion purposes only since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy. IRS Circular 230 Disclosure: Pursuant to IRS Regulations, neither the information, nor any advice contained in this communication (including any attachments) is intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. U.S. Trust operates through Bank of America, N.A., and other subsidiaries of Bank of America Corporation. Bank of America, N.A., Member FDIC. © 2014 Bank of America Corporation. All rights reserved.
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