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Planning that Reduces Your Taxes


If you're wondering what you can do now to save taxes on April 15, here are a few techniques to reduce taxes on investments and your estate. You could be saving tens of thousands of dollars.

Even though April 15 is months away, a lot of our oral surgeon clients are looking for techniques to use now that can save them taxes later. In the last article we spoke about saving tens of thousands of dollars on your 2012 income tax bill, and now we’ll discuss capital gains and estate tax planning concepts.

This year, tax planning is especially important because of significant tax increases set to arrive on Jan. 1, 2013. Consider:

• Not only are the Bush tax cuts set to expire, but a new 3.8% surtax on investment income and a possible reinstated claw-back of itemized deductions could raise the federal tax rate on ordinary income to as high as an effective 44.6% for many oral and maxillofacial surgeons — with state taxes on top of this.

• Similarly, the tax rate on long-term capital gains could increase from 15% to 20% and the rate on qualified dividends from 15% to an effective 44.6%.

• Finally, if Congress doesn’t take action, the federal estate tax rate will increase from 35% to 55% and the exclusion amount will drop from $5.12 million to $1 million.

Techniques to reduce taxes on investments

1. Gain harvesting

For many oral surgeons it will make sense to harvest capital gains in 2012 to take advantage of the current lower rates. You would sell appreciated capital assets and immediately reinvest in the same or similar assets. You would then hold the new assets until you would otherwise have sold them, so there would be no change in your investment strategy.

However, deciding whether to use the strategy is not as simple as it might appear on the surface, because the lower tax rates generally must be weighed against a loss of tax deferral. By harvesting the gains in 2012 you would be paying a lower tax rate, but recognizing the gains earlier. The greater the differential in tax rates and the shorter the time before the second sale the more favorable gain harvesting would be.

In some cases, the correct decision will be clear without doing any analysis. If you are currently in the 0% long-term capital gains bracket, then 2012 gain harvesting would always be favorable because it would give you a free basis step up. Gain harvesting would also be more favorable if you planned to sell the stock in 2013 or 2014 anyway. The time value of the tax deferral would be small compared with the future tax savings.

At the other extreme, if you are currently in the 15% long-term capital gain bracket and plan to die with an asset and pass it on to heirs with a stepped-up basis, there is no reason to recognize the gain now. You would be incurring tax now without any offsetting future benefit. Nor would it make sense to harvest losses to create additional capital loss carryovers. These loss carryovers would be better employed to offset capital gains in the future when rates are expected to be higher.

If you do not fall into one of these categories, you will have to do a quantitative analysis to determine whether 2012 gain harvesting would work for you. The decision could be thought of as buying a future tax savings by recognizing gain in 2012. By analyzing the decision in this way, you could measure a return on the 2012 investment over time. If this return on investment exceeded your opportunity cost of capital, gain harvesting would make sense.

2. Planning for the 3.8% Medicare surtax

For tax years beginning Jan. 1, 2013, the tax law imposes a 3.8% surtax on certain passive investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of 1) net investment income (NII) or 2) the excess of a taxpayer's modified adjusted gross income (MAGI) over an applicable threshold amount.

Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuities and royalties. Specifically excluded from the definition of net investment income are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or qualified plan distributions and income from charitable remainder trusts. MAGI is generally the amount you report on the last line of page one, Form 1040.

The applicable threshold amounts are:

Married taxpayers filing jointly $250,000

Married taxpayers filing separately $125,000

All other individual taxpayers $200,000

A simple example will illustrate how the tax is calculated.


Al and Barb, married taxpayers filing separately, have $300,000 of salary income and $100,000 of NII. The amount subject to the surtax is the lesser of (1) NII ($100,000) or (2) the excess of their MAGI ($400,000) over the threshold amount ($400,000 -$250,000 = $150,000). Because NII is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000 and the surtax payable is $3,800 (.038 x $100,000).

Fortunately, there are a number of effective strategies that can be used to reduce MAGI and or NII and reduce the base on which the surtax is paid. These include 1) Roth IRA conversions, 2) tax exempt bonds, 3) tax-deferred annuities, 4) life insurance, 5) rental real estate, 6) oil and gas investments, 7) timing estate and trust distributions, 8) charitable remainder trusts and 9) installment sales and maximizing above-the-line deductions. We would be happy to explain how these strategies might save you large amounts of surtax.

Estate tax planning

The estate tax exemption is currently $5.12 million per person and will revert to $1 million on Jan. 1, 2013 unless Congress acts. The president is suggesting a $3.5 million exemption. The potential reduction in the estate tax exemption is resulting in many client making large gifts, in trust, for their family.

In some instances the trusts are for the spouse, children and grandchildren, and in other cases they are just for children and younger generations. Most experts would define the savings at 35%, 45% or 55% of the amount gifted over $1 million. On a $5 million gift the savings would be $1.8 million ($4,000,000 X 45%).


This article gives you a few ideas for potential tax savings for 2012 income and beyond. For larger practices with $3 to $5 million or more of revenue, there are additional techniques which could offer significantly greater deductions.


OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).

For additional information about OJM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.

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