Year End Tax Planning II: Creative Strategies

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Appreciated AssetsCarefully considered timing of the sale, gifting or donation
of appreciated assets is one of the most efficient tax planning strategies.

First, let’s review capital gain rates:

Capital Gains
Tax Rate
Taxable Income
(Single)
Taxable Income
(Head of Household)
Taxable Income
(Married Filing Jointly)
0% Up to $47,025 Up to $63,000 Up to $94,050
15% $47,026 to $518,900 $63,001 to $551,350 $94,051 to $583,750
20% Over $518,900 Over $551,350 Over $583,750

Now let’s look at some approaches that could save you – or your estate – some money.

1. Donating appreciated assets:

One of the most tax-efficient ways to support your favorite charities is to donate appreciated assets. The recipient organization does not pay any gain on the appreciation in value of the assets and the donor does not recognize any taxable event.  Another tax efficient way to donate to charity is through Required Minimum Distributions (RMDs) on your retirement accounts. Even if you do not itemize on Schedule A, the donation reduces taxable income, and you will have fulfilled his/her obligation of taking the annual RMD (and avoided the penalty for not doing so).

2. Gifting appreciated assets:

Another strategy may be to gift appreciated assets to loved ones that are in a lower tax bracket. Let’s say your grandchild recently graduated from college and is starting off in the workforce. Most likely, he/she is earning a lower starting salary and is in a much lower tax bracket.  For example, let’s say Grandpa decides to gift to Granddaughter $10,000 of Apple stock with a basis of $100 (gain of $9,900). Granddaughter starts work in July, and for six months of work earns $30,000. Granddaughter sells the appreciated stock for a gain of $9,900 and her taxable income is $39,900. Since her capital gains tax rate is 0%, Granddaughter is not taxed at the federal level on the gain from sale of stock! (Note that she may be taxed at the state level.)

There may be non-tax issues to consider, such as the maturity of the recipient, and whether or not Grandson will fly to Vegas and blow the money at the blackjack table.

3. Holding appreciated assets:

Did you invest in Apple or Microsoft stock in the 80s? Did you purchase real estate a while ago, and the value has appreciated significantly? One of the best tax strategies is holding onto appreciated assets until death. When the inevitable happens, the IRS provides for a step-up in basis. This means that there may not be taxation on the appreciation in assets. By illustration, let’s say an individual invested $1,000 into Apple stock in the 80s, and it’s now worth $1,000,000. If the individual sells the stock, they recognize a gain of $999,000. At a combined federal and state tax rate of 35%, the tax is $349,700. By not selling the stock, you’ll make your heirs $349,700 richer!

Your AKM CPA and our support team can help you evaluate both the upside and downside of using a particular strategy.  Please contact us with any questions or concerns.

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