There’s more at stake this tax-filing season than taking advantage of a few last-minute items, although certainly that can be done. In the larger scheme, the 1040 now being prepared for a high-income client or prospect is a referendum on the tax sensitivity of his or her portfolio in today’s environment.

As you probably know, a 3.8% tax applies to some or all of the client’s net investment income if the return is filed jointly and earnings are above $250,000, or $200,000 if filed for a single. Clients start forfeiting itemized deductions and personal exemptions when their joint income hits $300,000, or $250,000 if single. Above $450,000 of taxable income for joint filers ($400,000 for singles) lies a robust 39.6% ordinary tax rate, as well as a 20% rate on long-term capital gains and qualified dividends.

Of all these new-for-’13 hikes on high earners, the Medicare surtax, as the 3.8% net investment income tax is occasionally called, commands center stage. Its complexity has experts aghast.

“The knowledge needed to comply with this tax is, in many ways, almost equal to the knowledge needed to comply with the regular tax and the alternative minimum tax,” says Robert Keebler, a CPA and principal at Keebler & Associates LLP in Green Bay, Wis. Good grief.

The foreboding complexity is partly due to the late arrival of final Internal Revenue Service regulations regarding the tax. They were published in November concurrently with newly proposed regs on some especially sticky issues. Tax returns for 2013 may employ these rules.

For clients, the wait was worth it. Many of the regs are taxpayer-friendly. But their late publication adds to practitioners’ worry that tax software may not be up to the challenge.

“That’s the elephant in the room,” says Stuart Lyons, a Portland, Maine, CPA and principal at Baker Newman Noyes. With 80% of his clients expecting to owe surtax, he’s nervous, and not just because of the regs’ tardy entrance. Published even later were draft instructions for new Form 8960, which is used to compute the tax.

So Lyons plans to check his tax software with “side calculations, just to understand what’s going on, because it’s new to [the software providers] and it’s new to us.”

What’s a financial planner to do?

Keebler advises, “Start adding value by understanding what investment income is subject to the 3.8% tax and what is not. Then plan to meet with clients and their CPAs immediately after April 15 to chart a course to reduce the impact of all the new taxes.”

Benefiting From Recent Regulations
One IRS clarification lets clients benefit from certain pre-2013 capital loss carry-forwards when determining their surtaxable net investment income.
Similar to the usual rules, “You can use up to $3,000 of net capital losses to offset other investment income that is subject to the 3.8% tax. That didn’t appear permissible before” the recent regs, says Mark Luscombe, federal tax analyst at CCH Inc., an information and software provider in Riverwoods, Ill.

Real estate professionals—individuals who spend at least 750 hours per year and half of their personal-service time in real-property businesses—are among the few who can escape the dreaded 3.8% surtax. There are actually two ways they can avoid it, and there’s even an election that can help them, but it must be made the first year the client is subject to the tax.

One way is if the rental activity qualifies under the tax code as a trade or business.

The other involves satisfying a safe-harbor test under the regulations. It requires the real estate professional to participate in rental real estate activities for more than 500 hours during the year, or more than 500 hours in five of the past 10 years, Luscombe says.

This is where the helpful election mentioned above comes into play. Called regrouping, the election allows the client to aggregate activities in order to meet the safe harbor’s 500-hour requirement, or to clear the 750-hour hurdle for qualifying as a real estate professional, Luscombe says.

Here’s an example courtesy of Keebler: Say the client owns two properties, each in a different limited liability company. The tax code considers these separate activities. Further suppose the client spends over 500 hours managing one property and 50 hours managing the other. On its own, the second property wouldn’t meet the 500-hour safe harbor and its income would get socked with the 3.8% tax. But regrouping it with the first property would satisfy the time requirement and eliminate the surtax, Keebler says.

There is a potential downside, however. It can crop up down the road if the client ultimately disposes of his separate activities in piecemeal fashion, according to CPA Blake Christian, a partner at HCVT LLP in Long Beach, Calif.

He offers the hypothetical example of a passive real estate investment that’s produced $20,000 in losses annually for the last five years that the client couldn’t deduct if he had no other passive income to offset it. If this were a separate investment activity, upon disposing of the investment the client would usually be able to write off the $100,000 accumulated passive loss.

“But if he had previously made an election to regroup it with other passive real estate activities, that $100,000 loss would not be deductible until he disposed of all the activities in the bundled group,” Christian says.

New Tax On Earned Income
Compared with the drama surrounding the 3.8% surtax, another new health-care levy looks to be something of a nonevent from a tax-prep standpoint. The 0.9% additional Medicare tax on wages and self-employment income above $250,000 for joint filers ($200,000 for singles) is calculated on new Form 8959, a straightforward one-pager that feeds off information shown on the client’s W-2 and elsewhere.

“Clients aren’t going to have to look for records that they haven’t already collected for preparing their 1040,” says Michael Sonnenblick, senior tax analyst for Thomson Reuters in Manhattan.

This tax applies to the same kinds of wages to which the long-standing Medicare payroll tax applies. Counted here are bonuses, commissions, taxable gifts from employers to their employees and amounts deferred under nonqualified deferred compensation plans that are taken into account for payroll-tax purposes, Sonnenblick says.

For individuals who work for themselves, including advisors, “anything that lowers self-employment income, such as depreciation deductions, will lower their additional Medicare tax” as well as their regular self-employment tax, Sonnenblick says.

One nasty twist: A self-employment loss can’t offset any wage income subject to the 0.9% tax.

Health-care taxes aren’t the only changes worth telling clients and prospects about.

“I’m shocked by how many gay couples are unaware that they need to file their 2013 federal taxes as married,” says attorney Nicole Pearl, a partner in the Los Angeles office of McDermott Will & Emery LLP. In the wake of the U.S. Supreme Court’s ruling last summer in the Windsor case, legally wed couples must now file federally as married, regardless of whether their state recognizes same-sex marriage, she says.

Gay couples also may not realize that if one spouse doesn’t work, contributing to a spousal individual retirement account by April 15 could lower their tax bill, assuming the usual conditions are met, says Erica Nadeau, tax principal at DiCicco, Gulman & Company LLP, an accounting and business-consulting firm in Woburn, Mass. For 2013, the maximum deductible contribution is $5,500, or $6,500 if the non-working spouse reached age 50 or older by year’s end.

More Changes
The threshold for itemizing medical expenses has risen to 10% of adjusted gross income for clients age 64 and younger in 2013. It remains 7.5% for older clients, including joint filers with only one spouse 65 or older last year, Nadeau says.

There’s also a new, optional way to calculate the home-office deduction. It is called the “simplified” method, which is a dubious appellation from the accountant’s perspective. Now you have to do two calculations to determine which method is more advantageous, says Lyons. Clients are free to jump between methods each year.

The new approach isn’t likely to win many fans for the modest $1,500 maximum deduction it allows, although it is simple. The deduction is $5 per square foot on up to 300 square feet of home-office space.

Under the method, depreciation on the home is not allowed. More favorably, 100% of the client’s mortgage interest and real estate taxes can be taken as itemized deductions—no more fussy apportionment between business and personal use.