The rubber has hit the road, and advisors are witness to the squealing. Despite frequent conversations with wealthy clients in recent times about the specter of rising taxes, “I’ve seen a lot of shocked looks on faces this year when we project people’s income and tell them how much tax they’ll owe for 2013,” says CPA David O. Erard, a partner at HCVT LLP in Orange County, Calif. “The reality of higher taxes is here.”

As you meet with clients to discuss year-end tax maneuvers, they will probably ask how the new increases impact them. “It’s a complicated answer,” says CPA Sarah Knight, managing partner at Knight Field Fabry LLP, in Denver. “Clients feel like all the changes are going to affect them, but only some may apply, or none,” she says.

For example, few of her retirees have modified adjusted gross incomes larger than the threshold for paying the loathsome 3.8% Medicare surtax on net investment income, which is $250,000 for joint filers and $200,000 for singles. Or perhaps just a small amount of their MAGI is above it. “People don’t appreciate that the 3.8% surtax is only on the incremental amount above the threshold, and that it’s on the lesser of the excess MAGI or their net investment income,” Knight says.

So you may be able to awe some anxious folks by explaining that the tax hikes don’t touch them, or not much. “But for those affected by the changes, it is a hard pill to swallow,” Knight says.

A tax of 0.9% on earned income, including self-employment earnings, kicks in at the same threshold as the surtax on investment profits. When adjusted gross income tops $300,000 for joint filers or $250,000 for singles, phase-outs curtail personal exemptions and certain itemized deductions.

And a 39.6% top ordinary tax bracket, up 4.6% from last year, awaits joint filers with taxable incomes exceeding $450,000 ($400,000 if single). These clients also pay 5% more on their long-term capital gains and qualified dividends this year, 20% versus 15%.

Estimated Tax A Primary Concern
Clients slapped with these increases could get nasty surprises next spring, such as an unexpected tax bill on April 15, or worse, an Internal Revenue Service penalty for underpayment. With three-quarters of the year now in the history books, it’s a great time to update clients’ 2013 income projections, estimate the federal tax liability and compare it with their withholding and estimated taxes.

“Even people with no change in income from last year could potentially owe the IRS because of the law changes,” says CPA/PFS Mike Tedone, a partner at Connecticut Wealth Management in Farmington, Conn. To help with cash-flow planning, clients who can delay paying taxes until April without penalty should be reminded how much they’ll owe, Tedone says.

Workers with high salaries are particularly vulnerable to under-withholding of the 0.9% additional Medicare tax on earned income, especially if they changed jobs midyear or have working spouses, says Knight, the Denver accountant.

To illustrate, take a single client who earns $175,000 from each of two employers. With earned income of $350,000, minus the $200,000 threshold for singles, he’ll owe additional Medicare tax on $150,000. Yet employers don’t withhold the tax until a worker’s wages reach $200,000. So none of this tricky little tax will be taken out of the client’s paycheck by either employer.

Now consider a married couple, with one spouse earning $175,000 and the other $300,000. Their joint earned income of $475,000, minus the $250,000 threshold for taxing joint filers, leaves $225,000 subject to additional Medicare tax. But the first spouse won’t have any of the tax withheld, and the second spouse’s employer will only withhold on $100,000 (a $300,000 salary, minus a $200,000 threshold for withholding).

“Clients need to understand that there may be additional withholding once they make more than $200,000 from a single employer, but it may not be adequate,” Knight says. These clients can boost withholding at work for the remainder of 2013 or make an estimated tax payment.

High, Certain And Stable
Taxes aren’t just loftier. They’re also etched in stone, notwithstanding the occasional tax reform blabber out of Washington. Enactment earlier this year of the American Taxpayer Relief Act established a stable set of rates and rules for 2013 and beyond, giving planners the gift of certainty.

Sureness about the future facilitates traditional multiyear planning, where you shift income to low-rate years and deductions to high-rate ones when possible, taking into account the alternative minimum tax, notes Kansas City-based CPA Scott Slabotsky, a managing director at national accounting provider CBIZ MHM.

Income planning is in vogue, too, to prevent the client’s earnings from spiking into surtax or phase-out territory, or into the next bracket, all of which take effect at different income levels.

To help clients appreciate the tax cost of phase-outs, explain that when individuals who are subject to the so-called Pease limitation on itemized deductions earn $1 more, their taxable income typically increases by $1.03, a 3% adjustment. Because the ordinary bracket of these taxpayers is usually at least 33%, the phase-out effectively adds at least 1% (33% of 3%) to the marginal rate. The personal exemption phase-out augments the woe.

Note that high-income single individuals face scrunched brackets. When their taxable income breaches $398,350, the ordinary rate rises from 33% to 35%, then quickly advances to 39.6% above $400,000.

Strategies For Elevated Rates
With so much potentially at stake, there is enhanced value to keeping income off the client’s tax return. This can be accomplished in many ways, of course, including via such timeworn strategies as maximizing contributions to qualified retirement plans and taking losses to offset gains.

Tell clients age 70 and a half or older this is the final year they can make tax-free qualified charitable distributions. QCDs allow taxpayers to give up to $100,000 directly to charity from their individual retirement account without having to count the distribution as income. This is also the last year clients can exclude from income cancelled debt on a principal residence, Knight says.

Real estate investors may be able to keep gains off their returns with a Section 1031 like-kind property exchange. With this technique, investors can defer all or a significant portion of their gain on one investment property by reinvesting in another, following very structured rules.

Erard, the Orange County CPA, reports “a significant uptick” in the number of 1031-related questions he’s fielded from clients in 2013. “As long as the client wants to remain invested in real estate, a 1031 exchange can be a pretty good option,” Erard says. The drawbacks include the complexity of the exchange and the lowered depreciation deductions on the new property compared to acquiring it outside of a 1031 exchange.

Some real estate investors may be able to avoid the 3.8% surtax on their rental real estate income. “If they can qualify as a real estate professional under code Section 469(c)(7), and then further qualify to be considered in a trade or business for purposes of Section 1411, that’s one of the few carve-outs from the surtax,” says Erard.

To qualify as a real estate professional, the client must devote more than half of his or her working hours, and at least 750 hours, to certain real estate activities; document the time spent on those and other activities; and meet other requirements.

Deduction Planning
Turning now to the deduction side, clients have one last shot at some breaks set to expire December 31, most notably the above-the-line deduction for teachers’ classroom expenses and the itemized deduction for state and local sales taxes instead of income taxes.

For business owners (including advisors) the situation is more dramatic. The maximum write-off under Section 179 for equipment purchased during the year plunges from $500,000 in 2013 to $25,000 in 2014. And this is the last year entrepreneurs can take 50% bonus depreciation on most new property.

To maximize the benefit of itemizing for clients who have relatively small deductions, recommend the age-old strategy of “bunching,” i.e., shifting as many deductible expenses as possible into one year in order to clear the standard deduction hurdle, which for 2013 is $12,200 for joint filers and $6,100 for singles.

A similar approach produces benefits even when the client’s itemized deductions exceed the standard deduction each year by a modest amount, according to planner Roger Pine, a partner at Briaud Financial Advisors in College Station, Texas.

Consider a client couple with $15,200 in annual deductible expenses. Itemizing for 2013 provides them with $3,000 additional deductions over the $12,200 standard deduction. If we assume the same numbers will hold for 2014 (even though the standard deduction is indexed annually for inflation), then itemizing in both years gives the clients a total of $6,000 in additional deductions, compared to taking the standard deduction.

But if the client can “double up” the expenses in one year to $30,400, Pine says, the benefit of itemizing soars dramatically, even though this tactic forces the client to take the standard deduction in the second year. Here’s the math: $30,400 in itemized deductions, minus a $12,200 standard deduction, yields $18,200 in additional deductions from itemizing in a single year, more than triple the $6,000 benefit of itemizing in both years.

Of course, anytime you start shifting deductions around, you have to consider the alternative minimum tax consequences. Yet the impact may be diminished or even eliminated this year for some lucky clients, according to Erard. Taxpayers owe the IRS the difference between their regular and alternative minimum taxes when the AMT is higher, and that difference may have narrowed for the client as the phase-outs and new top tax rate push his regular tax upward.

Clients who are no longer in the AMT’s grasp may need new advice. “Some of my clients who in the past paid state taxes after the end of the year [because they were subject to AMT] may instead accelerate their payments into 2013,” Erard says. State taxes are deductible when the client is not in alt min.

There’s a broader lesson here, Erard observes. “The 2013 changes increase the importance of revisiting your assumptions.”