More On Tax Planningfrom The Advisor's Professional Library
- IRAs: Eligibility The eligibility rules for contributing to traditional and Roth IRAs are complicated. Learn how to effectively use them in retirement plans.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
There’s no way around it: both women and men, whether married or single, will see some changes to the income tax landscape in 2013 now that President Obama and Congress’ fiscal cliff deal is a reality.
Women—whether they’re young, in mid-career or retirement age—can expect to see a few tax rules that affect them especially. Women returning to the workforce after staying home with their kids, for example, need to know about what is and isn’t deductible, while seniors may need to re-examine the tax side of their investment portfolios.
And then there’s what might be called the tax season gender gap.
Eileen O’Connor, a wealth manager with McLean Asset Management in McLean, Va., finds that while her female clients are increasingly interested in finance and investing, they tend to find taxes daunting.
“More women want to be involved on the investment side, but they still feel resistant on the tax side,” said O’Connor, who spoke last year in a TD Ameritrade Institutional webcast that asked, “What Do Wealthy Women Want?”
Women Advised to Get on Board the Tax Train
Yet with the highest federal tax rate rising to more than 40% for the highest earners, women are well-advised to get on board with tax planning, O’Connor noted. She pointed to the 2013 high-earner rates of 39.6% for income taxes compared with 35% in 2012, plus the new 3.8% Obamacare tax, plus the increase to 20% from 15% for both capital gains and dividends for the highest earners.
“If the highest bracket is 40% or more, that’s going to have a big impact on the ability to accumulate wealth,” O’Connor said.
Barbara Kogen, a financial advisor, accountant and tax lawyer, agreed. In California, where she lives and works near Los Angeles, married couples with taxable income over $450,000 and single people with taxable income over $400,000 face 2013 state and federal taxes that can total as much as 55% of earnings.
“All these little hidden things are taxes that people weren’t really focused on,” Kogen said after totting up the combined figures of payroll tax plus the Obamacare-related surtaxes on net investment income, wages and self-employment. “You’re well into the mid-40 percentages without even thinking of state tax. In California, we’re in the mid-50s. It’s very painful.”
On the other hand, Peggy Cabaniss, a certified financial planner who served as 2005-2006 chairwoman of the National Association of Personal Financial Advisors (NAPFA), said that a surprisingly large majority of American taxpayers will see no difference to what they’ll pay in 2013 compared with 2012.
“We have so many people coming in saying, ‘we’re so worried,’ and we say, ‘why?’ and they say, ‘didn’t you hear that Obama has raised our taxes?’ But the reality is that the only tax rate increases are for taxable income over $400,000 if you’re single and $450,000 if you’re married,” Cabaniss said. “The truth of the matter that it’s only a small percentage of the population that’s really paying these higher rates. After deductions, many people will really have the same tax rates as last year.”
Go to the next page for a roundup of what Cabaniss, Kogen and O’Connor are discussing with their female clients this tax season.
Read What Do Wealthy Women Want? at AdvisorOne.
With senior women, Cabaniss is seeing more and more cases where a husband who previously took care of taxes and investments is now in need of medical care, and his wife for the first time in her life is in the position of taking responsibility for their finances. At the same time, these senior couples are often getting hit with big medical expenses that can be claimed as itemized medical deductions.
Cabaniss (left) gives the example of a couple who previously took in $70,000 in income and had $10,000 in deductions, leaving them with $60,000 to live on annually. But if the husband’s medical costs total $8,000 per month, that’s a backward equation of $96,000 in deductions a year exceeding income of $70,000. The solution, according to Cabaniss, is to get rid of the tax-sheltered investments in the couple’s portfolio, including municipal bonds, and buy taxable securities such as stock and corporate bonds.
“A lot of times older people think the most important thing are muni bonds and muni funds. You hear a lot from seniors that they want tax-free income,” Cabaniss said. “If you have high medical expenses, you will not benefit from that tax-free income. You want taxable investments. But many times women haven’t been responsible for the tax return or investments, and they say, ‘I’ve got to do what my husband did because he always did the right thing.’ But in this case, you really have to change your strategy.”
Barbara Kogen, financial advisor, CPA, tax lawyer and partner at Miller, Kaplan, Arase, North Hollywood, Calif.:
Kogen looks for what she calls “hidden tax traps” that people aren’t aware of until tax time. “It was a crazy time last year because there was so much uncertainty with the tax laws expiring in 2012 and temporary extensions. Clients would come in for advice and we would have to say, ‘This is our best advice, but we don’t know what’s going to happen.’”
As for her female clients, Kogen (left) said the income tax increase “impacts them greatly” because any married woman who has returned to work during the economic recovery now faces the tax burden of being part of a two-income household. Even couples without a lot of investment income—a couple that earns $300,000 with $5,000 of interest income, say—meet the $250,000 threshold for the 3.8% tax.
“From the time value of money standpoint, it’s usually better to defer income to future years and accelerate expenses to keep the current year’s income lower,” Kogen said. “But in 2012, we told our clients, ‘We think 2013 taxes will be higher, so accelerate all the income you can in 2012 because it will be cheaper than taxes in 2013. And any deductions you can defer, wait until 2013 because the tax rates will be higher.”
Eileen O’Connor, certified financial planner and managing principal of wealth management, McLean Asset Management, McLean, Va.:
Roth IRA conversions, believe it or not, have a gender bias, says O’Connor, whose firm has done a lot of Roth conversions for clients.
The reason is longevity risk, O'Connor (left) explained: “The combination of women living longer and a potentially high and higher tax environment in the future means that tax planning should be a priority especially for women because every extra dollar added to your portfolio is going to help. The longer you live, the more sense it makes to make Roth conversions early.”
In other words, many women should convert their savings now to Roth IRAs so they can be withdrawn tax-free in retirement—a powerful tool for women as they age, she said.
“If a woman converts now to a Roth IRA, she would take her $100,000 traditional IRA, for example, and convert it to a Roth and pay tax now on the $100,000 before she retires,” she said. “If that sum grows to $500,000, and it’s 100% tax-free in retirement and not subject to interest dividends or any earnings, it’s powerful. We’ve converted millions and millions and millions of dollars into Roths.”
Read Top Tips for Women at Tax Time at AdvisorOne.
Check out AdvisorOne’s special report home page: 20 Days of Tax Planning Advice for 2013.