Tax Strategies for Higher-Income Tax Payers

Judson is collaborating with Wells Fargo Advisors to bring you a new series of blog posts focused on helpful tips and relevant information regarding financial issues that affect older adults.


After the United States Constitution was finalized, Benjamin Franklin wrote famously in a letter: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

And while paying taxes is a certainty in this life, the amount you pay is most certainly not. This brief overview should help to summarize some of the key areas you and your tax advisor should assess this tax season, as well as areas your financial advisor can assist you in potentially mitigating your tax liability.

Tax Planning Considerations

The American Taxpayer Relief Act of 2012 increased taxes for most higher-income taxpayers. If you find yourself in this group, it’s critical to stay focused on long-term objectives and meet with your financial advisor to develop and manage an asset allocation strategy to continue working toward your goals.

Some common tax planning considerations include timing of income and deductions as well as understanding the character of the income you receive. The two primary considerations we’ll discuss today are:

  • Deferral of compensation
  • Alternative minimum tax (AMT)

Should You Defer Compensation?

Whether you should defer income depends on your individual situation, what goals you’re attempting to accomplish, your need for current income and your employer’s (or business’s) flexibility. As always, taxes should be only one of many factors you weigh as you make your financial and investment decisions. However, deferring receipt of taxable income can help reduce your current exposure to the:

  • Highest (39.6%) tax bracket, which starts with taxable income of $413,200 (single) or $464,850 (married filing jointly)
  • 20% long-term capital gain and qualified dividend rate for those in the 39.6% tax bracket
  • 3.8% Medicare surtax on the lesser of net investment income or the excess of MAGI over $200,000 (single) or $250,000 (married filing jointly)

As mentioned earlier regarding long-term capital gains, keep your eye toward a balanced approach and actions that may be in your best interest. For any decision you consider that enables you to defer income, you’ll need to determine whether the tax savings is more important than the benefits of receiving and enjoying a higher income (whether in wages or investment returns).

Are you subject to Alternative Minimum Tax (AMT)?

The AMT calculation is separate from the regular taxable income calculation and requires you to add back certain tax deductions and income exclusions to your regular income tax to arrive at your alternative minimum taxable income. Your chances of paying AMT may increase if you have:

  • Several dependents
  • Interest deductions from home equity loans or refinanced mortgages that were not used to buy, build or improve your home
  • Interest from certain private activity municipal bonds (AMT bonds)
  • High ordinary income or capital gains
  • High state and local taxes
  • Exercised and continue to hold incentive stock options (ISOs)

Depending on your personal situation, other AMT adjustments may also apply. Even limited exposure to only one or two items that can trigger AMT may subject you to the tax. As a higher- income taxpayer, you should talk with your tax advisor about the possibility of incurring AMT. He or she may be able to do a projection to help evaluate your AMT potential.

Look Beyond Taxes with a Team Approach

Depending on your objectives and net worth, you may want to consider additional techniques, such as other charitable trusts, alternative investments, and insurance strategies. The tax code is now more complicated, and there is even more interplay between taxable income, AGI, tax brackets, and investment taxation. That’s why you may benefit from talking with your entire team of advisors – your tax and legal advisors along with your Financial Advisor – early in the tax year. As a group, you can evaluate how any of the techniques in this post may help you meet your investment, legacy planning, philanthropic and tax-management goals.

Want more details to assist you this tax season?

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