There's no way around it: both women and men, whether married or single, will see some changes to the income tax landscape in 2013 now that President Obama and Congress' fiscal cliff deal is a reality.
Women—whether they're young, in mid-career or retirement age—can expect to see a few tax rules that affect them especially. Women returning to the workforce after staying home with their kids, for example, need to know about what is and isn't deductible, while seniors may need to re-examine the tax side of their investment portfolios.
And then there's what might be called the tax season gender gap.
Eileen O'Connor, a wealth manager with McLean Asset Management in McLean, Va., finds that while her female clients are increasingly interested in finance and investing, they tend to find taxes daunting.
"More women want to be involved on the investment side, but they still feel resistant on the tax side," said O'Connor, who spoke last year in a TD Ameritrade Institutional webcast that asked, "What Do Wealthy Women Want?"
Women Advised to Get on Board the Tax Train
Yet with the highest federal tax rate rising to more than 40% for the highest earners, women are well-advised to get on board with tax planning, O'Connor noted. She pointed to the 2013 high-earner rates of 39.6% for income taxes compared with 35% in 2012, plus the new 3.8% Obamacare tax, plus the increase to 20% from 15% for both capital gains and dividends for the highest earners.
"If the highest bracket is 40% or more, that's going to have a big impact on the ability to accumulate wealth," O'Connor said.
Barbara Kogen, a financial advisor, accountant and tax lawyer, agreed. In California, where she lives and works near Los Angeles, married couples with taxable income over $450,000 and single people with taxable income over $400,000 face 2013 state and federal taxes that can total as much as 55% of earnings.
Hidden Taxes
"All these little hidden things are taxes that people weren't really focused on," Kogen said after totting up the combined figures of payroll tax plus the Obamacare-related surtaxes on net investment income, wages and self-employment. "You're well into the mid-40 percentages without even thinking of state tax. In California, we're in the mid-50s. It's very painful."
On the other hand, Peggy Cabaniss, a certified financial planner who served as 2005-2006 chairwoman of the National Association of Personal Financial Advisors (NAPFA), said that a surprisingly large majority of American taxpayers will see no difference to what they'll pay in 2013 compared with 2012.
"We have so many people coming in saying, 'we're so worried,' and we say, 'why?' and they say, 'didn't you hear that Obama has raised our taxes?' But the reality is that the only tax rate increases are for taxable income over $400,000 if you're single and $450,000 if you're married," Cabaniss said. "The truth of the matter that it's only a small percentage of the population that's really paying these higher rates. After deductions, many people will really have the same tax rates as last year."
Go to the next page for a roundup of what Cabaniss, Kogen and O'Connor are discussing with their female clients this tax season.
Read What Do Wealthy Women Want? at AdvisorOne.
Peggy Cabaniss, NAPFA-registered certified financial planner and president of HC Financial Advisors Inc., Lafayette, Calif.:
Cabaniss (left) gives the example of a couple who previously took in $70,000 in income and had $10,000 in deductions, leaving them with $60,000 to live on annually. But if the husband's medical costs total $8,000 per month, that's a backward equation of $96,000 in deductions a year exceeding income of $70,000. The solution, according to Cabaniss, is to get rid of the tax-sheltered investments in the couple's portfolio, including municipal bonds, and buy taxable securities such as stock and corporate bonds.
As for her female clients, Kogen (left) said the income tax increase "impacts them greatly" because any married woman who has returned to work during the economic recovery now faces the tax burden of being part of a two-income household. Even couples without a lot of investment income—a couple that earns $300,000 with $5,000 of interest income, say—meet the $250,000 threshold for the 3.8% tax.
The reason is longevity risk, O'Connor (left) explained: "The combination of women living longer and a potentially high and higher tax environment in the future means that tax planning should be a priority especially for women because every extra dollar added to your portfolio is going to help. The longer you live, the more sense it makes to make Roth conversions early."
