Many New Yorkers know that, as part of the federal tax package compromise that was passed on January 1st of this year, the capital gains tax rate was increased. Last year the top rate was 15% but that is now up to 20%. In addition, some individuals will also face a 3.8% investment surcharge tacked on top.
Prudent estate planning always takes tax considerations into account, and transferring assets which have accumulated in value is one of the most important (but trickiest) aspects of the process. As such, it is prudent to closely consider ways to legally save on taxes, particularly considering the new rates.
Forbes on Capital Gains
A personal finance article from Forbes delves into some general strategies that may be used to legally save on those capital gains taxes. For one thing, there may be great benefit to saving assets until death so that heirs get a "stepped up" basis on assets which have appreciated considerably. In many cases, this results in those assets moving to heirs without the capital gains tax coming due at all. Though, don't forget that other taxes (like the estate tax) will still be in play at those times.
Yet, depending on your situation, there may come a time when assets must be sold before death. For one thing, seniors are often forced to sell assets in order to pay for retirement or long-term care. This may risk a huge capital gains tax bill. [Sidenote: this is one of many reasons why it is prudent to invest in long-term care insurance].
So what can one do to save on capital gains while alive? For one thing, passing on gifts to children or others under the annual tax exemption rate may be prudent. As the WSJ story reminds, "you can give $14,000 a year in cash or property each to as many individuals as you'd like without eating into your lifetime gift/estate tax exemption."
Other strategies can be used to keep one's income below the mark which imposes the 3.8% investment tax ($200,000 for singles/$250,000 for couples). One way to do so is to put more money into retirement savings accounts like 401(k)s as pre-tax contributions. This won't eliminate all capital gains, but it is always worth saving even smaller amounts like 3.8% from leaving your bank accounts.
The story delves into many other specific financial strategies, some which impact long-term estate planning. It is worth perusing the entire story, and hopefully acts as a spur to seek out professional guidance on all of these matters to protect assets for you and your family.