September 20, 2016 ronwave

Tax Alert: Californians May Now Face Income Tax Rates Greater Than 50%


MinowCPA Guide to Effective Tax Planning in 2013

Dear Clients and Friends:

In 2013, the Internal Revenue Service (IRS) and California Franchise Tax Board (FTB) increased the income tax brackets. The highest income earners now face a 39.6% federal marginal income tax rate. In addition, the IRS layered on two additional taxes for higher income earners, including a tax on Net Investment Income (NII) of 3.8% and a Medicare tax on wages and self-employment earnings of 0.9%.  California also increased its marginal income tax rate up to 10.3% for the highest earners. Thus, the combined Federal and State marginal income tax rate for many Californians now exceeds 50%!

Despite the increased tax rates, the government does have a friendly side to it.  However, this friendlier side is SHRINKING and becoming ever more COMPLICATED.  Three distinct areas where the government has provided opportunities for taxpayers to mitigate the increased tax rates lie in the areas of retirement planning, capital investment and charitable giving.

Retirement Planning – You may be able to reduce your taxes by contributing to a retirement plan.  If your employer sponsors a retirement plan, such as a 401(k), 403(b) or SIMPLE plan, your contributions and investment earnings avoid current taxation until you begin receiving distributions from the plan.  In 2013, elective deferrals to the plans range from $5,500 to $23,000, depending on the type of plan and the taxpayer’s age.  For self-employed taxpayers, setting up a retirement plan may achieve even greater results. Also, on a somewhat related note, setting up a health or dependent care Flexible Spending Account (FSA) is another way to keep income out of the highest tax brackets. Retirement plans take time to set up, so please contact us immediately if you think this is a good strategy.

Capital Investment – Bonus depreciation and enhanced Code Section 179 expensing can provide immediate reductions to business income taxes.  For qualified assets acquired and placed in service on or before December 31, 2013, the additional first-year bonus depreciation allowance is generally 50%.  Alternatively, a Section 179 election allows a business to expense up to 100% of the cost of qualified asset purchases up to $500,000.  Asset purchases that may qualify for at least one of these strategies include: machinery and equipment, automobiles (new or used), leasehold improvements and software.  There are many exclusions and phase-out’s for these depreciation-related tax breaks, so please consult with our office if you are considering to make a large capital asset purchase before the end of the year.

Charitable Giving – With marginal income tax rates over 50%, it may make better sense now more than ever to donate to your local charity rather than pay taxes to the US Government.   A tax deduction is available for cash contributions to qualified charities up to 50% of adjusted gross income (AGI) and up to 30% of your AGI for charitable gifts of appreciated property (plus you may avoid the capital gains tax on gifts of appreciated property).  For those charitably-inclined taxpayers planning the sale of a significant asset, consider implementing a charitable remainder trust.  You may be able to avoid capital gains tax on the sale and retain the income from investing the sales proceeds, while securing a charitable deduction for at least part of the value of the property.

Beyond these three areas where the IRS continues to provide taxpayers with benefits, taxpayers must now more than ever have a keen awareness of their projected tax positions over a number of years into the future and implement strategies to plan for and shift the timing of income away from the dreaded NII and Medicare taxes (and Alternative Minimum Tax) and do their best to keep taxable income away from the highest income tax brackets.  Planning for and timing your income to remain out of the highest tax bracket and avoid the NII tax, Medicare tax and Alternative Minimum Tax will be tricky, but may certainly pay off if you are able to avoid these additional layers of taxation. The point here is to become a “tax-player” rather than a taxpayer.

The strategies above are some of the more common methods MinowCPA can help you evaluate and plan for your 2013 taxes and shield you from the highest tax rates.  Every taxpayer situation is unique and individual circumstances must be evaluated.  Also, the above strategies are far from exhaustive.  Please do not hesitate to contact us with specific questions and to discuss your unique tax situation.