In a world served by money, it might come out as surprising that the high-income executives are the most underserved population for reliable financial guidance. Although they have more digits in their numbers, they share the problems of a common man. However, the top executives reserve a unique set of needs as well, having to grapple with the ever-tightening income tax liabilities and finding the right tax-preparer being some of them.
As the estate tax exemption for a person stands already too high at $5.43 million per person, tax advisers have narrowed down their focus to managing the income tax liabilities of their clients. The top marginal bracket remains at 39.6 percent; the taxable income in this bracket for singles is $400,000, and for married couples filing jointly, it is $450,000. Many financial advisers expect the taxable income levels to raise by 0.5 percent in step with government inflation benchmarks in the upcoming financial year.
For singles, if their modified adjustable gross income is more than $200,000 and for married couples, $250,000, they also have to pay a 3.8 percent Medicare surtax on their net investment income. Moreover, they have another 0.9 percent Medicare payroll withholding tacked on to their incomes.
It is important to adjust with an expected upcoming trend. For example, in case you expect your income to rise, it is better to accelerate deductions, prepay state-income tax or sell securities at a loss. It is also a good option to postpone some of that increased income, perhaps by maxing out 401 (k) plan contributions, to a year when you expect to have less income.
Although it can be a tricky thing to decide whether to pull the lever on deductions or to take advantage of them when the need should arise, it turns out to be one of the most rewarding things in the long run, if done right. Certified tax preparers at MVW Services in Artesia, CA can further guide you in this regard.
To escape the tax penalties related to Obamacare, you need to demonstrate that you are covered by a Health Insurance Plan that comes up to the standard of the Affordable Care Act. According to Tim Steffen, director of financial planning at Robert W. Baird & Co., the penalties are quite nominal in the first year; however, they rise exponentially over time.
Make sure to keep your income-producing investments in tax-sheltered accounts. It becomes especially important if the taxpayer hovers around the edge of a higher taxable income category. The income from these investments, including bonds and real estate investment trusts, is taxed just like ordinary income and often pushes such a taxpayer over the cliff into the higher category.
A Certified Public Accountant, Lyle Benson of L.K. Benson & Co., who is also a CFP, recommended selling the hedge fund for its being “horribly inefficient”, and moving other income-generating investments into retirement accounts, to a client in 2014.
The higher estate tax exemption urges the professional tax advisers to revisit their traditional advice of “giving away as much as you can during your lifetime”, as Steffen puts it.
Some people may no longer have to pay the federal estate tax but still need to pay it in their state because every state has different rules about estate taxes and the state inhabited by the tax payer may just have lower tax exemption limits. If you are in California, MVW Services in Artesia, CA can offer you professional accounting and tax preparation services.
The dwindling situation of Social Security and Medicare trust fund does not hold a very promising future for people in the high tax bracket (28% and above), who will pay more for the Medicare and other health care expenses and receive even less than75% of their projected Social Security benefits. As the Medicare trust fund exhausts in 2024 and Social Security has just enough revenue to pay about 75% of their promised benefits starting in 2033, the situation of a high tax payer is expected to grow more dismal.
The choice between pre-tax and Roth contributions isn’t as straight-forward as it may seem at first. Pre-tax contributions lower your taxable income enough to qualify you for the tax breaks offered on the basis of income. If you make pre-tax contributions, it’s only too logical that you will invest your tax savings to come out at the same place in terms of numbers. However, the earnings on those tax savings would be subject to taxes which brings you where you had started from. This is where the Roth account comes to your rescue. Determine which tax bracket you are in, and how much you would need to save to end up at the upper limit of the tax bracket below your existing one, by the time you retire. Anything you happen to save beyond that would go into your Roth account, in case the upper limit of the tax bracket below yours extends by the time you retire.
Maxing out your contributions is a remarkable opportunity to contribute pre-tax and make tax-free withdrawals, at least for health-care expenses. Seeing the situation of Medicare, you are likely to have considerable health-care expenses after retirement so it’s expected that the money will be tax-free which, in turn, may make you want to let your Health Care Account grow untouched for retirement.
You need to be very skeptical if your financial adviser is pitching expensive investment strategies or charging unusually high fees. There is a vast research literature demonstrating little to no advantage of paying high investment fees for active management.
Sticking to individual securities, low cost index funds and ETFs is more advisable most of the times. Find a tax professional that bills you hourly or annual fee to manage such a well-diversified portfolio. This helps you out of a possible conflict of interests, the risk of which you run while taking up the services of a tax-preparer or a financial adviser who sells products for a commission or charges you a percentage of your portfolio.
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