Fifteen Tax Moves For Right Now. Really?

with No Comments

1040-2013

The February issue of Financial Planning Magazine contained an article entitled “15 Tax Moves For Right Now.” It suggested that “the eleventh-hour tax deal reached in Washington will require some new strategies for advisors and their clients.” The difficulty with the tax deal and the list is that it offer few methods of actually avoiding any of the additional taxes enacted other than producing less income.

For those who think that raising the top marginal rate doesn’t have an effect on the average citizen, imagine that instead of passing these taxes along in trickle down taxation, the highly productive simply decide to follow these rules and produce less?

Here are the supposed 15 Tax Moves for Right Now accompanied by my commentary on what they actually mean:

  1. Face the Medicare Surtax: There is an additional 3.8%. Pay it.
  2. Check the Withholding: Medicare payroll tax for high earners rises from 1.45% to 2.35%. Pay it.
  3. Maximize Adjustments: Reduce your AGI as much as possible while any deductions are still allowed such as contributing to your 401(k) or 403(b). These are the loopholes that Obama wants to eliminate.
  4. Say Yes to Deferred Comp: Defer as much compensation hoping that if you realize it later, the country may not be punishing productivity as much then as they are now.
  5. Mind the Phase-Out: The most productive (highest earners) have some of their deductions and charitable contributions “phased out” so that they are not allowed to deduct them and are subject to a higher tax. Pay it.
  6. Bundle Medical Costs: The threashold for deducting medical expenses is rising from 7.5% of AGI to 10% of AGI. See if you can put all of your illnesses into the same year so some of them might still be deductible.
  7. Location, Location: Put as much of your assets into tax sheltered accounts as possible.
  8. Munis More than Ever: While you might be able to avoid taxes and the Medicare Surtax, munis aren’t paying very much and some municipalities are likely to continue defaulting.
  9. Gift Till It Hurt: Don’t re-invest in economic growth by starting another company. It just isn’t worth it. Work as hard as you can to give it all to charities. But keep in mind that these deductions are “phased out.”
  10. Consider a GRAT (Soon): There may still be ways to pass on more than the estate planning limits without the government taking half of it. But the government is eying the supposed loop-hole, so do it now.
  11. Zero in on Under-Valued Assets: Give your heirs things that are undervalued and you can get even more of what might grow out of your estate.
  12. Continue Roth Conversions: The last three years were an amazing opportunity to move money where it will never be taxed again. Although it isn’t as attractive, it is still best to try to find a method of avoiding the current extremely progressive tax structure.
  13. Give Roths a Twist: Continue Roth conversions after retirement. Because it is just that important to get out from under this punitive income tax code.
  14. Give Big Now: Even if you don’t know where you are giving, put the money in a donor-advised fund and direct where it goes later. Whatever you do, don’t start another business.
  15. Face California’s Tax Hike: As if taxes weren’t high enough in California, they’re going higher. Pay it. Consider California munis? Maybe not with the high default rate.

Notice that there is nothing that allows you to produce more and avoid any of these taxes. This is why a tax on production, especially a progressive tax on production, is one of the worst methods of taxation. If you’re not an economist, you may vastly underestimate the negative impact of taxes on the U.S. economy. Many of the productive simply Go John Galt.

There are still tax planning strategies for those who want to remain highly productive and still not get gouged on their 1040. But not these 15 suggestions. They offer little relief.

Subscribe to Marotta On Money and receive free access to the presentation: 10 Money Ideas in Retirement.

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.