certified financial planner with Noll Financial Services
Q: What steps can a person or business take now to reduce hassle during tax season?
A: The biggest issues right now are income distribution planning. The current tax environment, the current tax brackets have become much more progressive, meaning the more income you have, the much larger the percentage of tax you're paying. It actually makes tax planning and income distribution planning a valuable tool to do, so you want to get in front of your tax preparer ahead of time to say, “What should we do to take advantage, in essence, of the lower-income tax brackets?”
Where we always thought tax deferrals might be the best strategy for high-net-worth individuals, it may not be. For example, if you had the ability to spend down your IRA in your 60s using up the 10, 15 and 25 percent bracket (you should), as opposed to deferring this huge IRA to when you're 70 1/2 and perhaps you are left with a $7 million IRA and then every distribution you're required to take thereafter would end up putting you in the 39.6 tax bracket.
It's all about leveling out your income when you can and taking advantage of the lower tax tables when you can.
What are some common concerns of high-net-worth individuals as a calendar year closes?
Again, it's “How much tax will I pay? Am I subject to the 3.8 (percent) additional tax?” (That 3.8 percent) is called a Medicare tax on long-term gains.
It's all about “What is my tax rate?” and the answer, unfortunately, is we have to run the numbers. Even with long-term capital gains, there are now four brackets — the 0, the 15, 18.8 and 23.8. The use of gains harvesting in a lower-income year is being used to try to take advantage of those lower tax brackets. It's just so hard for a high-net-worth individual to know what tax they're going to pay.
Starting in 2013 and moving forward, you're seeing the differences in the tax tables. For instance, the marriage penalty came back ... and it even drifts down into the 25 percent tax bracket as opposed to just for the very high-earning individuals.
You and your father have helped clients with financial planning for decades. How have those clients' typical needs changed over the years?
We're seeing a much stronger focus on long-term-care insurance. It seems like the stories of people having a dementia-like issue are becoming more prevalent and the need for long-term care is becoming more mainstream, where before people would put their head in the sand and wouldn't discuss it.
Clients are (now) willing to discuss it, willing to discuss end-of-life issues as far as estate planing and living wills because there are more stories of “we had a friend who did this” and they don't want that to happen to them. That is becoming a much greater concern.
Of course, recently, the health changes with the Affordable Care Act and all the uncertainty there is becoming a great concern, especially for the people who aren't yet 65 and they do want to retire. I think over the next year everything will become clearer.
What considerations should there be when someone is choosing between an IRA, 401(k) and other options for income?
The big choice is Roth versus IRA. Does it make sense for a person who is in the 0 percent or 10 percent bracket to defer all their money into an IRA? Probably not. It may make more sense for them to have a Roth IRA.
From a tax standpoint, the IRA versus 401(k) are all taxed the same. ... It's all focused on where you expect your income to be.
One of the newest changes out there is the ability of the people who have a 401(k) to do intra-Roth conversions within that 401(k). The old law said you had to be eligible for a distribution. Now, it's open to everybody as long as the plan permits.
For the higher wage-earners, it's again leveling out that income, filling up those brackets and trying not to end up with a $7 million IRA when you're 70 1/2.
A native of Lower Swatara Township, Russo and her family moved back to the area a few years ago. She and her husband, Dan, have a son who is 8 and twin girls who are 6. The family enjoys skiing and going to the beach, and Russo has coached youth soccer.
Russo is past president of the Pennsylvania Institute of Certified Public Accountants’ Central Pennsylvania chapter. She enjoys talking to groups about improving financial literacy.