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Saving for retirement in high-tax time
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With a slew of new income taxes this year affecting both the wealthy and the not-so-wealthy, you’re probably wondering what you can do to lower your taxable income.
For income earners in the top 1 percent, the tax rate rose to 39.6 percent this year from 35 percent last year. Wealthy Americans also saw a 5 percent increase in both capital gains and dividend-tax rates and a new 3.8 percent tax on some investment income, as well as a 0.9 percent tax on income of more than $250,000 per couple.
A far larger number of Americans, about 160 million, are feeling the impact of Social Security payroll taxes returning to their 2010 level of 6.2 percent. In 2011 and 2012, the payroll tax — which affects those making up to $113,700 a year — was only 4.2 percent. For the average worker making about $50,000 a year, that means about $1,000 more in taxes this year, according to the nonprofit Tax Policy Center.
No one can avoid the tax man for good. But you can defer taxable income for retirement when you likely will be in a lower tax bracket.
One way to defer taxable income is to maximize your contributions to your retirement plan, whether it is a 401(k) or traditional individual retirement account. Contributions to these accounts are not taxed until withdrawn. Contributions to a Roth IRA are taxable, but then grow and may be withdrawn tax-free.
This year, you can save up to $17,500 in a 401(k) — a 3 percent jump from 2012. Those ages 50 and older can add an extra “catch up” contribution of $5,500 for a total of $23,000 in 2013.
If you don’t have a 401(k), you can contribute up to $5,500 ($6,500 if aged 50 or older) to a traditional or a Roth IRA in 2013. Also, you may be able to contribute the same amounts to a spousal IRA — even if the spouse has little or no earned income.
Another way to minimize your tax bill is through your investments. Losses are deductible and gains are taxable. Depending on your situation, you might want to sell a depreciated investment prior to year end and take the deduction or postpone the sale of an appreciated investment until the new year to defer the taxes on that gain.
Capital losses are deductible up to the amount of your capital gains plus $3,000. The maximum tax on most capital assets held more than 12 months rose from 15 percent last year to 20 percent this year.
State or municipal bonds may be another good investment for those in higher tax brackets. Many Georgia bonds are tax-exempt. Last year, the state offered 2.69 percent interest on tax-free bonds. Commercial bonds may offer higher interest, but for individuals in higher income-tax brackets, the taxes on these bonds may offset any gains.
Finally, you can lower your income-tax liability by donating assets to your heirs or charity.
The gift tax exclusion rose to $14,000 per individual or $28,000 per couple this year from $13,000 or $26,000 last year. You can give these gifts to as many individuals as you like without paying federal gift taxes.
You also could donate the assets of appreciated investments using a charitable remainder trust to avoid otherwise taxable gains. The trust allows the charity to sell the assets tax free and reap a greater benefit than if you had sold the assets and donated the profits minus the amount subject to taxes. Also, you may deduct the fair market value of the property.

Smith and Barid are co-founders of Savannah-based Smith Barid LLC, which specializes in elder law, estate planning and special needs planning. They can be reached at 912-352-3999 or or

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