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Income Tax Planning Using Estate Planning Techniques

April 16, 2014

Over the last several years, we have seen a substantial evolution in the transfer tax arena here in the United States.  As a result of several favorable legislative changes, it has become the case that only for a very small and rarified layer of taxpayers will estate taxes remain a concern going forward.

As things presently stand, estates which are lesser in value than $10.68 million for a married couple or $5.34 million for a single individual will not be subject to any estate tax, as the lifetime exemption will eliminate the tax.  Interestingly however, what we are finding is that a great many of the techniques from estate planning strategies can also sometimes be used for income tax planning to assist taxpayers.  In fact, income tax planning, especially for our clients who earn high incomes and have substantially assets but are below the $10 million threshold, can have great benefit by using these techniques to have an impact on the income taxes they pay.

For taxpayers with income above $250,000, the marginal rate of tax can be as high as 43.4%.  When coupled with state income taxes here in Virginia at 5.75% or higher in some other states, the income tax rates which are imposed become very substantial.  As a consequence, taxpayers who wish to find ways to do income tax planning have begun to examine a variety of techniques with far greater interest.

Once traditional income tax planning including contributions to qualified retirements plans and the like have been exhausted, the question becomes: what else might we do to have a positive impact on our tax burden?  The answer is that traditional estate planning techniques offer many alternatives which, if properly utilized, can defer the taxability of income as well as eliminating significant spikes which are driven by the disposition of assets.  While all of these techniques require a taxpayer to deal with a more complex structure and sometimes provide for a benefit to a charity, in the right circumstances these techniques can add significant income tax reduction to the mix for the taxpayer.

The specific technique to be used will vary based on the facts and circumstances of each individual case.  Suffice it to say, the approximately 30 available techniques which have been developed and are used as traditional estate planning techniques when correctly employed, can allow for a significant amount of income tax savings in specific situations which are carefully and thoroughly planned.

Given our current tax environment, we are of the opinion that over the next 5-10 years estate planners will spend more time doing income tax planning and less time doing transfer tax planning, while affording their clients greater security in the process.  Please contact us if you would like to have a conversation concerning using these techniques to decrease your tax exposure.