Women and Taxes: Tax Season Gender Gap?

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.