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by Susan M. Mitcheltree, CFP®

A silver lining to the cloud of recession and equity market declines a few years back was the accumulation by many clients of carry forward capital losses. When the market fell considerably in 2008 and 2009, many advisers chose to harvest those losses by selling the investments at a loss and recording the tax loss for the client. Even in the face of the need to comply with the wash sale rule provisions, these losses were harvested, resulting in accumulated carry forward capital losses for future years.

Over the last four years as the equity market has steadily rebounded, albeit with some bumps and bruises along the way, clients have watched their portfolios come back from the dreadful recession doldrums. Today, most clients are encouraged regarding their future prospects and some go as far as being quite optimistic. This feeling seems justifiable given the truth that the stock market has come back with surprising strength since the market low of March 2009 to experience a doubling of market returns as noted by the S&P 500 March 2009 to date.


The New Tax Normal

The tax landscape has profoundly changed with the passage of the American Taxpayer Relief Act of 2012 (2012 Act). In our new world, we have been reintroduced to the 39.6 percent tax bracket for high income earners—those with taxable income in excess of $400,000 if single and $450,000 if married filing jointly. Clients who fall into this category are also subject to increased long-term capital gains and a qualified dividends tax rate of 20 percent, which previously stood at 15 percent in 2012. 

2013 also ushered in an additional tax law change creating a new tax known as the 3.8 percent Medicare tax. This new Medicare tax is applicable on the lesser of a taxpayer’s net investment income or modified adjusted gross income (MAGI) in excess of $200,000 (single taxpayers) and $250,000 (married filing jointly). Additionally, for those clients at AGI levels above $250,000 (single) and $300,000 (married filing jointly), several income tax deductions (notably itemized deductions and the personal exemption) will be curtailed as household incomes increase.

In this new tax normal, individuals are cognizant that things are improving but are equally on guard that, as a country, many challenges still face us. Unfunded government liabilities loom large over the heads of working and retired Americans, with the knowledge that at some point, the structural deficits will catch up with us and will need to be addressed. We have already experienced some tax reform to increase government revenue and augment our progressive tax system. These changes continue the migration toward a federal tax structure in which those who earn more contribute more toward society.


Back to the Unpleasant Surprise

Under the guidance of their advisers, clients harvested taxable capital losses from their portfolios in the wake of the great recession. Since that time, clients have incurred capital gains via portfolio adjustments and, if applicable, via account distributions. After applying these capital gains against carry forward losses, clients have additionally been writing off $3,000 of these carry forward losses against their ordinary income year after year, since the losses were harvested at the bottom of the market. 

Tax year 2013 may usher in a surprise for clients. Clients have been consuming the fruits of these carry forward losses for a number of years now, and the losses may have dwindled down to very little or possibly nothing for tax year 2013. With the eleventh-hour tax changes at the end of last year, many advisers went so far as to recommend harvesting taxable gains in 2012 for their high tax bracket clients, given the impending 2013 tax increases on the horizon. Under the auspices of the forthcoming tax law changes, this was a smart financial move at the time; however, this helped several clients speed up the use of the carry forward losses and by extension, precipitating the necessity for a frank conversation with the client sooner rather than later.

The looming realization for clients is just around the corner. Many are now in the predicament where they have consumed all of their remaining capital loss carry forward and their tax returns will now show net capital gains, without tax deductions or tax credits to offset these gains. Coupled with higher capital gains rates and the Medicare surtax, this may lead to a rather unpleasant surprise for many taxpayers when it comes time to file their 2013 return.


Changing a Challenge to an Opportunity

The sagacious planner knows that difficult client conversations are inevitable, and they are to be embraced and not shunned. These conversations are moments where the adviser-client relationship can solidify and grow into a true advisory relationship, built on a foundation of trust, taking a challenge and changing it into an opportunity. 

To ease the distaste of a higher tax bill for 2013, here are some ideas to employ in an effort to be proactive on the subject of tax planning for 2013.


Hold a Preview Tax Meeting

To begin, encourage clients to reach out to their CPA or tax professional immediately for a preview planning meeting to assess if any adjustments or changes are warranted prior to the third-quarter federal deadline estimated taxes of October 15. Preview tax meetings and running tax projections will cost the clients some dollars up-front, so it is best to prepare your client for that beforehand. However, when compared with the potential for tax savings on the back end from any number of planning techniques, these could be dollars well spent.

A preview tax meeting can uncover opportunities early where additional planning can be done to benefit the client’s tax and investment situation. Are there tax credits or tax deductions still available for the year? Are there additional places where taxable income can be sheltered?

For self-employed individuals or those who have some control over the timing of income and expenses, have they considered the additional planning opportunities available to them via this flexibility? They may want to consider tax planning around temporarily deferring income or clustering expenses, if appropriate, to maximize deductions.

Additionally, these meetings are a good gauge to assess whether the taxes paid by the client will suffice to meet the IRS safe harbor, thereby avoiding being subject to penalties for underpaying estimated taxes. An industry-wide challenge lies in the fact that many mutual funds do not make capital gains distributions until the very end of the calendar year. From a tax perspective, this presents a planning hurdle. Clients may want to talk with their accountants about estimating capital gains distributions early and paying smaller estimated tax bills over a period of months or at least by the fourth-quarter filing date of January 15 to avoid a hefty tax bill and possible penalties for underpaying quarterly estimates when they file their 2013 tax return in 2014.


Don’t Overlook Loss Harvesting in 2013

Capital gains, although currently taxed at a more favorable rate than ordinary income, still serves to add to a client’s adjusted gross income for the year. The adjusted gross income and modified adjusted gross income figures drive much of a client’s ability to obtain or be denied for various tax credits and tax deductions. Consequently, although harvesting losses is a strategy often employed during periods of market decline, opportunities in this area of planning should not be overlooked this year. These efforts will help offset taxable capital gains and lower client’s adjusted gross income, possibly opening up additional tax planning opportunities.

It is important to note that some tax planning are available to clients now. Some strategies must be implemented before the end of the calendar year, so recommending a meeting early with the accountant is a prudent move for many clients. This is an opportunity to give good advice to clients and helps solidify your relationship with them for the ages. The strategies mentioned herein and others are simply a start and should be discussed with clients in conjunction with their tax professional to determine which, if any, of these strategies are applicable and appropriate for their tax situation.



Advisers assisting clients with proactive tax planning strategies can be of incredible value to the client. Your knowledge of the big picture, knowing your clients’ long-term planning goals, and working in conjunction with their accountants can save clients time and money each year by employing appropriate, proactive planning strategies. 

From the perspective of the accountant, working closely with a client’s financial planner allows a free flow of information between the two firms with the goal of balancing the minimization of taxes alongside the client’s long-term investment planning objectives. Taking the reins in this area of financial planning will both foster stronger relationships with your existing clientele as well as build your knowledge base in the professional community.

Susan M. Mitcheltree, CFP®, is vice president at Berman McAleer, a Maryland-based comprehensive planning and wealth management firm. She is a board director of FPA of Maryland, and participates in various financial literacy and education efforts.

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