The higher tax rates passed by Congress this year have some top U.S. earners seeking last- minute strategies to lower their tax bite as year-end calculations turn up unpleasant surprises.
“There are many, many high-income taxpayers now who are finding themselves facing tax rates in excess of 50 percent,” said Suzanne Shier, a tax strategist and director of wealth planning at Chicago-based Northern Trust Corp. “That really gets their attention.”
High earners are seeing a combination of federal tax increases for 2013: a top marginal rate of 39.6 percent, up from 35 percent; a 20 percent tax on long-term capital gains and dividends, up from 15 percent; and a new 3.8 percent tax on investment income. Also, limits on exemptions and deductions are taking effect for this tax year.
Some top earners are only now realizing they may owe much more by April 15 because they’ve been paying quarterly estimated taxes based on their liability for 2012, which the Internal Revenue Service allows in a “safe-harbor” rule, said Elda Di Re, a partner at Ernst & Young LLP.
Others are absorbing the effects as they rush to implement strategies before Dec. 31 to limit the tax bite on earnings, market gains and stakes in businesses.
State taxes can push the bill higher for some high earners. In California, the top rate is 13.3 percent on income exceeding $1 million.
Investors with significant portfolios are seeing some of the biggest increases this year, said Martin Kalb, co-chairman of the global tax group at Greenberg Traurig LLP.
For wealthy taxpayers, the rate on long-term capital gains and qualified dividends now can be as much as 25 percent, including the new surtax and limits on deductions, Kalb said. That’s a 67 percent increase from 2012. The rate on other investment income such as royalties, interest and rents can exceed 43 percent.
“Clients are a little startled at the amount of additional taxes they are paying,” said Maury Cartine, a partner at Marcum LLP whose clients include private equity and hedge fund managers.