Tax Tips Overview

Under the current tax climate, the best approach to successful tax planning is to implement strategies that reduce adjusted gross income (AGI). AGI is the amount that is reported on Form 1040, p.1, line 11. However, this approach runs contrary to our natural desire to strive to earn greater income.

As your AGI increases from $150,000 to over $600,000 it will be subject to the following Federal taxation:

1. The Federal rate at which your AGI will be taxed will increase from 24% to 37%, as described in Tax Brackets and Rates.
2. Your itemized deductions will be reduced or even phased out completely.
3. Your AGI may be subject to the following surtaxes:
   1. Alternative Minimum Tax (AMT). This is a complicated surtax that is calculated on Form 6251. The Tax Cuts and Jobs Act of 2017 (TCJA) changed several provisions in the calculation of the AMT, which in general reduced or eliminated this surtax beginning with 2018 Form 1040 returns.
   2. Additional Medicare Tax. A surtax of 0.9% imposed on employee wages and self-employment income in excess of the thresholds of $250,000 (married couples filing jointly; $200,000 for single filers). This surtax is calculated on Form 8959. The Additional Medicare Tax was enacted as part of the Patient Protection and Affordable Care Act (ACA) (a/k/a “Obamacare”) of 2010 and went into effect in 2013. Despite its name, all additional revenue raised by this surtax is deposited into the U.S. Treasury’s General Fund, not into the Medicare Trust Fund.
   3. Net Investment Income Tax (NIIT). A surtax of 3.8% imposed on net investment income, subject to the modified adjusted gross income (MAGI) thresholds of $250,000 (married couples filing jointly; $200,000 for single filers). This surtax is calculated on Form 8960. The NIIT was enacted as part of the Health Care and Education Reconciliation Act of 2010 and went into effect in 2013. All additional revenue raised by this surtax is deposited into the U.S. Treasury’s General Fund, not into the Medicare Trust Fund.
4. For Massachusetts residents only, substantial changes to Massachusetts income tax became law under legislation titled An Act to Improve the Commonwealth's Competitiveness, Affordability, and Equity (Act), which went into effect on October 4, 2023 but was retroactive to January 1, 2023.  One provision of this act increases the income tax of high-income earners.  Commonly known as the “Massachusetts Millionaires Tax”, this provision imposes an additional 4 percent income tax on Massachusetts income over $1 million. Accordingly, Massachusetts taxes the first $1 million of income at 5.0% and any income above this amount at 9.0%. 

There are a variety of strategies that can be pursued to reduce AGI. Amongst them are:

• Shifting income to other family members (primarily children) who are in a lower income tax bracket
• Purchasing municipal bonds to maximize tax-exempt interest income
• Reducing flow-through income (i.e., income from self-employment businesses, Partnerships,
• S-Corporations or rental real estate) by maximizing expenses and taking advantage of bonus depreciation allowances
• Utilizing the installment sale method on the sales of property
• Increasing contributions in IRAs or similar tax-advantaged retirement accounts
• Increasing contributions in Health Savings Accounts (HSAs)
• Making charitable contributions directly from an IRA to the charity(ies)

I would be happy to discuss any of these and other strategies with you at your convenience.

Following below are several strategies and suggestions to help clients to improve their financial planning, and possibly reduce their income tax liabilities. These are in response to the most frequently asked questions I receive from my clients.