To our valued clients,

Another year has come and gone and we at Rothamel Bratton hope 2013 was a good year for you and your family.  As you prepare for the holidays and look ahead to 2014, here are some changes in the law and suggestions for you to consider:

• The American Taxpayer Relief Act of 2012 took effect at the beginning of 2013 and resolved several long-standing questions about federal tax rates and rules.   Many people may see taxes go up.

• The final regulations under section 1411 of the Internal Revenue Code (Code) are now in place. These regulations provide guidance on the general application of the Net Investment Income Tax and the computation of Net Investment Income. The regulations affect individuals, estates and trusts when their incomes meet certain income thresholds.

In the case of an individual, section 1411(a)(1) imposes a tax  for each taxable year equal to 3.8 percent of the lesser of:

• (A) the individual’s net investment income for such taxable year, or (B) the excess (if any) of: (i) the individual’s modified adjusted gross income for such taxable year, over (ii) the threshold amount. Section 1411(b) provides that the threshold amount is:

(1) in the case of a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), $250,000;

(2) in the case of a married taxpayer (as defined in section 7703) filing a separate return, $125,000; and

(3) in the case of any other individual, $200,000.

• Section 1411(d) defines modified adjusted gross income as adjusted gross income increased by the excess of: (1) the amount excluded from gross income under section 911(a)(1), over (2) the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) with respect to the amount excluded from gross income under section 911(a)(1).

In the case of an estate or trust, section 1411(a)(2) imposes a tax  for each taxable year equal to 3.8 percent of the lesser of: (A) the estate’s or trust’s undistributed net investment income, or (B) the excess (if any) of: (i) the estate’s or trust’s adjusted gross income (as defined in section67(e)) for such taxable year, over (ii) the dollar amount at which the highest tax bracketin section 1(e) begins for such taxable year.

In light of these tax changes, you will also want to consider:

1. Lowering your taxable income

Taxes have increased:  ordinary income tax rates for those at the top of the income scale increased from 35% to 39.6% and last January, all taxpayers saw the Social Security payroll rate return to 6.2% (from 4.3% during a two year tax “holiday”). You could, therefore, benefit from basic tax-planning strategies to lower your taxable income.

The most straightforward way to reduce your taxable income this year is to take advantage of the new contribution limits to tax-advantaged retirement plans. For 2014, the maximum that an employee can contribute to a 401(k), 403(b) or 457 plan will remain $17,500, with employees aged 50 and over eligible to contribute an additional $5,500. Caps on tax-deferred IRA contributions will remain at $5,500, with a 50-plus catch-up limit of an additional $1,000.  Of course, there are certain deduction and contribution phase-outs.

It may also be worth considering lowering this year’s income by deferring compensation until next year..  If you are near retirement or if your income varies from year to year, it is especially worthwhile to explore options to decrease your taxable income.

2. Put your investment losses to work

For most people, the tax rate on long-term capital gains—for investments you’ve held for more than a year and that you’ve sold at a profit—is holding steady at 15%. If you earn more than $400,000 ($450,000 for couples filing jointly), though, your long-term capital gains will now be taxed at 20%. In addition, if your income exceeds $200,000 ($250,000 for couples filing jointly), you may be subject to the new 3.8% investment-income surcharge that’s added to your regular capital gains tax rate.

3. Look at Your Giving Plans

Last year’s generous exemptions for gifts made during your lifetime or from your estate are now permanent, and they’ve been enhanced by annual inflation adjustments. In 2014, you can pass along $5.34 million tax-free ($10.68 million for couples) in lifetime and estate gifts. The separate annual exclusion from gift taxes is at $14,000 per donee this year. This is especially important in states such as New Jersey and Pennsylvania where there are low threshold estate tax exemptions and inheritance taxes. 

With the use of tools such as a Grantor Trust, Life Insurance Trust, Incomplete Gift Non-Grantor Trust, Charitable Remainder Trust, Credit Shelter Trusts and other select options, we can help save all that you worked so hard to accumulate.  So whether you are looking to reduce taxes or are in need of preserving assets for family members with a potential need for long term care, we are here to assist.

Some of these changes may seem daunting, but we are here to help.  As you consider ways to reduce your taxable estate and preserve your assets, do not hesitate to call us for a review and advice. Together, we can ensure 2014 is a prosperous year for you and your family. 

Sincerely,

Charles (Chris) Bratton