You have a unique opportunity for significant capital gains tax relief – if you act quickly.
It’s not complicated. You don’t have to become a financial planner to understand it.
The following technique won’t work for everyone. But if you have loved ones (children, parents or others) who you want to assist, you have an amazing opportunity to do so and save a bundle in capital gains at the same time.
The technique involves shifting taxable gains to your loved ones who are in a lower tax bracket. It’s a fantastic idea but only available (for sure) for the next four months. After that, we don’t really know what the tax situation is going to be, so if you like this, don’t dawdle.
I read about this idea in the Investor’s Business Daily recently and I thought you’d like to hear about it.
In order to understand and take advantage of this opportunity, you have to keep in mind that for the next four months, we still have a 0% tax rate on capital gains. This rate is used for anyone who is in the 15% (or lower) ordinary income tax bracket.
You’re in that bracket if you are single and have less than $34,000 of taxable income and if you are married and have less than $68,000 of taxable income.
Let’s say you made great investments for your retirement. You’re set. Now, you want to help your married daughter improve her credit score. Your daughter and her husband earn $80,000 but have $30,000 in deductions. That means they have taxable income of $50,000. As a result, they can have another $18,000 in income and still be in the 15% bracket – which would mean they’d pay nothing in capital gains tax.
Let’s continue this happy story by assuming you have a stock that you paid $8,000 for several years ago. Now it’s worth $26,000.
You and your husband decide to give the stock to your daughter. Since you each have an annual gift tax exclusion of $13,000, you can (as a couple) gift your daughter the stock worth $26,000 without filing a gift tax return. Of course you pay no tax on the gift.
Your daughter graciously accepts the gift. She gets your cost basis and holding period so when she sells the stock for $26,000, her gain is $18,000. She adds that $18,000 to her income of $50,000. As a result, her taxable income becomes $68,000. And since she’s still in the 15% bracket, she pays nothing on the capital gains.
Had you sold the stock and then given her the gift, you would have had to pay capital gains on the sale – assuming you are in a higher tax bracket.
The only caveat is that your daughter has to sell the stock this year in order to ta advantage of the 0% capital gains rate. Nobody knows what the tax rate is going to be next year – but they can’t get any lower than zero, so I’d take advantage of this technique if it fits your circumstances.
This also works for you if you want to help elderly parents or anyone else. The only thing you have to watch out for is if you use this to help children. The kiddie tax comes into play there.
The “kiddie tax” is rather complicated and worthy of a post in and of itself, so we’ll have to defer that conversation.
Do you think you’ll be able to take advantage of this window of opportunity?