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Strategies for Navigating an Uncertain Landscape

In recent years, we have seen a greater tendency for last-minute decisions on economic policy legislation in Washington. On January 1, 2013, Congress passed the American Taxpayer Relief Act (ATRA), which addressed the scheduled expiration of the so-called Bush tax cuts, at the last hour (some would say after the last hour). More recently, debt ceiling and budget legislation, each of which can directly or indirectly have an effect on tax policy, also passed at the last hour, and in some cases a permanent resolution has simply been delayed. Adding to this legislative and policy uncertainty are other significant issues that could affect the economy, such as the Affordable Care Act, economic and political conditions in other countries, and foreign policy issues. These issues make it hard to expect anything other than continued uncertainty in coming years with respect to tax policy, especially when it comes to high earners.

While ATRA prevented income tax increases for most taxpayers, taxpayers with higher incomes were not so lucky, and what is certain, is that in 2013 and 2014, higher income taxpayers will pay an additional 3.8% Medicare Investment Income Tax on their investment income and a 0.9% higher Medicare tax on compensation. The addition of the Medicare Investment Income Tax results in a top effective tax rate of 43.4% on dividends, interest, and short-term capital gains and 23.8% for qualified dividends and long-term capital gains. The estate tax, with a new slightly higher rate of 40%, has a new "permanent" exemption of $5 million (2011 dollar-indexed for inflation), increasing it to $5.25 million in 2013 and $5.34 million in 2014.

Smart tax planning is prudent in any tax environment, and there are steps you can take now as the end of the year approaches. Here are some strategies to consider now:

  • With an eye to future performance, use current capital gains, as well as current and past losses, to help minimize tax exposure.


  • Consider a Roth conversion, or contribute to a Roth IRA or Roth 401(k) (if offered), which can provide tax-free income in retirement.


  • Max out contributions to tax-deferred accounts like 401(k)s or Traditional IRAs—subject to certain limitations, contributions can be made on a pretax basis and you do not pay income taxes on any earnings on your investments until you withdraw funds.


  • Diversify your portfolio with taxable, tax-deferred and/or tax-free investments to help you strategically manage your tax exposure.


  • Explore the options for gifting assets to loved ones now. Even though the estate and gift tax exemptions were made permanent and adjusted for inflation under ATRA, all taxpayers, regardless of their level of wealth, should have an estate plan in place that reflects their current end-of-life wealth transfer goals and objectives.


  • Consider using a securities-based loan to finance your tax liability. As an alternative to liquidating your assets, a securities-based loan may provide you with an opportunity to maintain your wealth management strategy and keep your investments on track for meeting your goals.


Contact a Financial Advisor who can work with you and your tax professional to help determine which strategies may be best for you to help you meet your financial objectives.
Learn More


To learn more strategies to navigate an uncertain landscape, read our article: Wealth and Taxes: Planning for 2014

These planning strategy reminders can help you keep your financial goals on track: Your Year End Planning Checklist

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