Under
current tax law, investors owe no more than 15% on
long-term capital gains and on qualified dividends.
(Most dividends paid to investors are qualified.)
Similarly, low-income investors owe 0% tax on long-term
capital gains and qualified dividends. Investors can
use this 0% tax rate if their taxable income -- after
deductions -- is no more than $34,599 as a single
taxpayer and no more than $69,000 on a joint tax return.
The 0% tax rate is
scheduled to remain in effect through 2012. However,
Congress may act to abolish this special rate. In
the meantime, you may be in a position to take advantage
of this tax break before year-end 2011.
Help
wanted
You should keep the 0% tax rate in mind if you are
helping relatives to make ends meet.
Example 1:
George and Meg Warner have a substantial income and
live comfortably. They also help to support Meg's
widowed mother, who has a modest income. From time
to time, the Warner's send Meg's mother a check for
$1,000, $2,000, or more.
Instead, the Warners
could give Meg's mother appreciated securities. They
could give her $20,000 worth of stock that they bought
years ago for $12,000, for instance. That stock is
really worth only $18,800 to the Warners, who would
owe a 15% tax on an $8,000 capital gain, if they were
to sell those shares.
Meg's mother could
sell the shares and owe 0% tax on the $8,000 long-term
gain, as long as the added income does not put her
over $34,500 in taxable income for 2011. Then she
would have $20,000 to spend, which might last her
for some time.
Will George and Meg
face gift tax consequences? That will depend on several
factors, including the amount of gifts they previously
have made to megs mother in 2011. The annual gift
tax exclusion, which is $13,000 this year, and the
current $5 million exemption for gifts not covered
by the exclusion, probably will keep the Warners from
owing a gift tax. (For more on the gift tax, see the
following example.)
Example 2:
Olivia Brown has a sizable income and ample net worth.
Her only child, Greg, is a schoolteacher whose wife,
Natalie, stays home with their two children. The young
couple has a taxable income of $30,000 a year, which
barely covers their expenses, and Olivia would like
to make a generous gift. Instead of writing a check,
Olivia could give appreciated securities that the
young couple can sell. Greg and Natalie Brown can
have up to $39,000 worth of additional income from
long-term capital gains this year and owe 0% tax.
Olivia will have to
file a gift tax return if she gives Greg and Natalie
more than $13,000 apiece in 2011. Those excess gifts
won't be taxed as long as Olivia's lifetime taxable
gifts are $5 million or less. The excess gifts, however,
will reduce Olivia's eventual estate tax exemption,
dollar for dollar.
Assume that Olivia
has never made any taxable gifts in prior years. She
gives a total of $50,000 worth of securities to Greg
and Natalie in 2011. The first $26,000 are covered
by this year's gift tax exclusion ($13,000 apiece),
and the other $24,000 will reduce Olivia's future
estate tax exemption. Assuming an extension of current
law, with a $5 million estate tax exemption, the $24,000
of excess gifts will reduce Olivia's exemption to
$ 4,976,000.
No
kidding
As covered in the August 2011 issue of the CPA Client
Bulletin, the so-called "kiddie tax" limits
the tax benefits of transferring appreciated securities
to very young recipients. This tax applies to the
unearned income of all children under age 18, many
18-year olds, and many students under age 24. In 2011,
unearned income over $1,900 reported by these "kiddies"
will be taxed at the parents' rate, so long-term capital
gains are likely to be taxed at 15%, not 0%.
Therefore, if you
are planning to take long-term capital gains, you
may get more tax advantages by giving the appreciated
assets to people not affected by the kiddie tax. In
addition to retired parents and young workers, graduate
students older than 23 may be able to receive these
gifts, sell them by December 31, and take thousands
of dollars worth of gains at the 0% rate.
The
15% solution
As mentioned earlier in this article, the future of
the 0% tax rate is uncertain. Similarly, Congress
might increase the current 15% tax rate on long-term
capital gains for years after 2011; taxpayers with
income over $200,000 may be especially vulnerable.
Therefore, if your plans include selling assets held
more than one year -- perhaps to pay college bills
-- you may want to sell those assets by year-end 2011,
when you can count on a 15% tax rate.
