Fran O’Rourke, senior vice president of Key Private Bank in the Capital Region\n<\/div>\n<\/div>\n

BY FRAN O’ROURKE<\/p>\n

Since the American Taxpayer Relief
\nAct was enacted in 2012, the tax burden
\nfor affluent Americans–in many cases
\nalso business owners–has increased
\nsignificantly.<\/p>\n

Including the 3.8 percent Medicare surtax
\non investment income and phase out
\nof itemized deduction to the highest rate
\nof 39.6 percent, the top marginal federal
\ntax rate on ordinary income is about 44.6
\npercent.<\/p>\n

In addition, the top rate for qualified
\ndividends and long-term capital gains is
\nabout 25 percent. Not to mention state
\nincome tax, which in New York adds another
\n8.82 percent of your income to your
\noverall tax burden.<\/p>\n

The following 10 wealth planning strategies
\ncan help you take advantage of all
\navailable opportunities to reduce your tax
\nbill. The key is that you must plan early.<\/p>\n

1. Navigate the new income, capital
\ngains, and Medicare surtax tax brackets.
\nDeferring compensation or capital gains
\nmay keep some taxpayers from jumping
\ninto a higher tax bracket. For instance,
\na taxpayer making $350,000 in taxable
\nincome who plans to sell an asset for a
\n$300,000 gain would see most of the gain
\ntaxed at 23.8 percent. Selling the property
\non an installment sale or using a charitable
\nremainder trust to spread out the
\nincome over several years may keep that
\ngain taxed at only 18.8 percent–a potential
\ntax savings of nearly $15,000.<\/p>\n

2. Review your investment portfolio. An
\ninvestment portfolio should be diversified
\nto reduce risk, but it should also be tax
\nefficient. Investors on the cusp of higher
\ntax brackets may consider investing more
\nin tax-exempt bonds or growth stocks
\nthat pay fewer dividends. Placing more
\nassets in tax-deferred accounts may also
\nbe considered.<\/p>\n

3. Take advantage of interest expense.
\nStructure debt in a tax-efficient manner.
\nFew people know that interest expense
\non debt that is used to acquire “taxable
\ninvestments” is deductible. Since
\ninvestment interest expense can also be
\ndeducted against the Medicare surtax, it
\nmay be even more valuable than the mortgage
\ninterest deduction. Even less well
\nknown is that cash accounts–whether
\nor not interest-bearing–can constitute
\na taxable investment for purposes of the
\ndeductions.<\/p>\n

4. Leverage IRA contributions and Roth
\nconversions. Self-employed taxpayers may wish to consider establishing SEP-IRA or
\nother retirement plans, even for a side
\nbusiness. All taxpayers, regardless of income,
\nhave the option of converting their
\ntraditional IRA to a Roth IRA. Roth IRAs do
\nnot require minimum distributions at age
\n70\u00c2\u00bd and allow for tax-free income during
\nretirement and for beneficiaries.<\/p>\n

5. Use appreciated securities for year-end
\ncharitable gifting. The after-tax cost
\nof a cash gift of $10,000 from an individual
\nin the top bracket is $6,040. On the other
\nhand, the after-tax cost of a gift of $10,000
\nworth of zero-basis stock is just $3,540. In
\naddition to the value of the deduction, the
\ndonor avoids $2,500 in capital gains tax.<\/p>\n

6. Take advantage of low interest rates.
\nConsider refinancing intra-family loans
\nand installment sales to trusts. These
\nloans can be as low as .32 percent short
\nterm. The minimum rate for three to nine
\nyear loans changes monthly; in 2014, the
\nrate has varied from 1.75 percent to a high
\nof 1.97 percent.<\/p>\n

Families of wealth can use these rates
\nto transfer considerable wealth free
\nfrom gift, estate and generation-skipping
\ntransfer (GST) tax. Low interest rates
\nalso create the opportunity to shift significant
\nwealth by using estate planning
\ntechniques, such as Grantor Retained
\nAnnuity Trusts (GRATs) and Charitable
\nLead Annuity Trusts (CLATs).<\/p>\n

7. Consider the annual exclusion, increased
\nlifetime gift tax exclusion and
\n529 plans. The annual gift tax exclusion
\nfor non-charitable gifts is indexed for inflation
\nand is now $14,000 per donor per
\ndonee. If the intended donee is a potential
\nfuture college student, consider gifting
\nto a 529 plan, which can offer income tax
\ndeferral, asset protection, the ability to
\nchange beneficiaries and the ability to
\n“front load” five years of annual exclusion
\ngifts. Irrevocable trusts can also better
\nexploit large gifts.<\/p>\n

Also, taxpayers who used up their full
\nunified credit amount in 2012 should
\nremember that, due to inflation adjustments,
\nthey received an additional
\n$130,000 of applicable exclusion amount
\nin 2013 and an additional $90,000 in
\n2014. A married couple who used up their
\ncredit in 2012 can make additional gifts of
\n$440,000 this year along with their annual
\nexclusion gifting.<\/p>\n

8. Review estate plans. Now that the exclusion
\nis “permanent,” taxpayers should
\nreevaluate any tax-motivated clauses or
\nbequests in their will or trust. Consider
\nadding flexibility through clauses such as
\npowers of appointment or trust protector
\nprovisions to allow adaptations to future
\ntax changes.<\/p>\n

9. Exploit basis and income tax planning
\nloopholes in bypass and other irrevocable
\ntrusts. With fewer estates being
\nsubject to an estate tax and capital gains
\ntax rates increasing, trustees should consider
\nadding provisions to enable capital
\ngains to be taxed to beneficiaries who may
\nbe in lower tax brackets than the trust.<\/p>\n

10. Exploit estate planning loopholes
\nbefore future “revenue raisers” are passed.
\nMany successful estate tax planning
\ntechniques could be adversely affected by
\nchanges Congress and the Obama Administration
\nare considering, such as valuation
\ndiscounts for family LLCs or partnerships,
\nGRATs, dynasty trusts, irrevocable
\ngrantor trusts and “Crummey” provisions
\nthat enable better exploitation of the annual
\nexclusion. Taxpayers with estates in
\nexcess of $5.3 million ($10.7 million for a
\nmarried couple) should strongly consider
\nthe potential impact of these changes and
\ndiscuss planning strategies to deal with
\ntheir impact with their private banker.<\/p>\n

O’Rourke is senior vice president of Key
\nPrivate Bank in the Capital Region.<\/em><\/p>\n

Photo Courtesy Key Bank<\/p>\n","protected":false},"excerpt":{"rendered":"

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