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Gifts of Long Term Capital Gains Legal Tax Angles: How to Save Taxes Without Going to Jail Assuming that you have some appreciated assets (capital gains) that would be subject to a maximum federal tax rate of 15%, you might be able to reduce the tax to 5% of the gain by making a gift of the asset to your children or to parents for whom you provide financial support. The recipient of a gift “steps into the shoes” of the donor with respect to the tax treatment of the property. There is a transfer of the tax cost and the holding period of the asset to the recipient. Thus, if you have property with a cost of $1,000 that now has a value of $10,000, you can either pay a 15% tax on the $9,000 gain, or you can give the asset to a relative in the 15% tax bracket and they would pay a 5% tax on the same gain. The taxable income of a single taxpayer (for 2003) is 15% (or less) on the first $28,400 of taxable income. Beyond that level, the tax rate ranges from 25% to 35%. For any single taxpayer with less than $28,400 of taxable income, a long term capital gain will be taxed at a maximum rate of 5%. (A long term gain is a gain on an asset that has been held more than a year.) For dependents, the standard deduction is limited to $750 of unearned income - regardless of the age of the dependent. If they are over the age of 13 and if you don't choose to include their income in your tax return (for simplicity), they are entitled to the full standard deduction for a single taxpayer, which is $4,750 for 2003 plus the personal exemption of $3,050. (But you will loose the personal exemption deduction for them.) In addition, they get up to $28,400 of capital gains at a 5% federal tax rate. Income diversion that involves the transfer of assets also offers estate tax benefits for those who are concerned about estate conservation. The income or assets that you divert to your children will keep that money out of your estate, because you have already transferred it to your children. For example, assume that you decide to make a gift of $100,000 worth of appreciated assets to your children. By selling the assets over a period of three or four years, they can keep the tax rate down to 5% of the gain. The expected earnings on the $100,000 might be about $7,500 a year, or $2,500 each. You have three children (over 13 years of age) who will receive equal shares of the income. They will owe no income taxes on the annual $7,500 of investment income, if you don’t claim them as dependents on your tax return. If you did not make the gift, you would have owed about $3,000 a year in federal income taxes on that income (assuming you are in the top bracket.). If you then died after ten years, the income tax savings would have been equal to $30,000. And ... assuming the $60,000 of after tax earnings plus the initial capital of $100,000 were subject to estate taxes, the estate tax might have been around $64,000. The total taxes would have been $94,000. By making a gift now, your children get $190,000 over the next ten years instead of $96,000. For those who are concerned about asset protection, transfers of assets to your family while you are solvent represents one of the primary methods of protecting assets from future lawsuits. It can be done with direct gifts, with gifts to an irrevocable domestic trust , gifts of an ownership interest in a family limited partnership. In addition to asset protection, such transfers also provide income tax savings and estate tax savings. However, these gifts of appreciated assets are not suitable for those who are not ready to give up the ownership and control of their assets. Other methods of tax avoidance need to pursued. Vern Jacobs Copyright, 2003 |
Books and Services by Vern Jacobs
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