Archive for December, 2010
With the tax deal extending the Bush tax cuts for two years now passed by Congress, your year-end review of realized and unrealized capital gains and losses also changes. This year most taxpayers should not be selling appreciated assets solely for tax reasons. Many taxpayers have capital loss carry forwards in excess of $3,000. An article at Forbes.com explains the rules and why there is generally no advantage to recognizing capital gains or losses in this situation. Even for taxpayers with recognized capital gains, the case for capital loss recognition solely for tax purposes is not very strong this year due to potential capital gains tax increases in 2013.
Short-term capital gains (meaning gains on assets held for less than a year) are taxed at ordinary income tax rates of up to 35%. Long-term capital gains are taxed at a top rate of 15%, with two big exceptions–gains that represent recapture of real estate depreciation are taxed at 25% and long-term gains on collectibles are taxed at 28%.
Short-term capital losses must first be used to offset short-term capital gains. If there are net short-term capital losses, they are then used as an offset against the net long-term capital gains. Similarly, long-term capital losses are first applied against long-term capital gains, with any excess applied against short-term capital gains.
Net long-term capital losses from any rate category are first applied against the highest tax rate long-term capital gains (meaning, for example, gains from collectibles taxed at 28%). Capital losses in excess of capital gains can be used to offset up to $3,000 of income from salary, taxable interest, or other ordinary income. Any remaining unused capital losses can be carried forward and used to offset gains in the next year, in the same order as describe above.
On a joint tax return, each spouse’s capital losses must be tracked separately for purposes of this rule. However, the capital losses of the decedent spouse may be used to offset capital gains of the surviving spouse in the year of death, including those gains incurred by the surviving spouse after the decedent’s death.
Since the tax deal is only for 2011 and 2012, in 2013 the long-term capital gains rate is scheduled to return to the pre-Bush rates, generally 20%. However, with the budget deficits and proposals for a flat tax (without special treatment for capital gains), it is clearly possible that the long-term capital gains rate could be higher than 20% at some point in the future.
Read the rest of the article here and answers to common questions at No Rush To Take Capital Losses
With estate taxes so uncertain, what is to be done? You will want to make sure your plan is updated for maximum flexibility and that your plan is designed to handle anything. Don’t be tempted to wait to update your estate plan until a new tax law is passed. You will just be leaving your family unprepared.
In fact, even if Congress does act within in the next few months, there will continue to be tax law changes in your future. You can contact our office to find out how to make your plan more flexible and keep your family protected under current tax laws.
For families with taxable estates even after the foundation plan is in place, a life insurance trust may be a solution.
Many people mistakenly believe that life insurance policies are estate tax free. Life insurance grows income tax free but the death benefit is includable in your gross estate for estate tax purposes.
Even young couples who otherwise would not have taxable estates, often own a significant amount of life insurance that will be estate taxable and will reduce the benefits available for their children. An Irrevocable Life Insurance Trust (ILIT) will remove the proceeds from your estate with the result that the proceeds will be fully available to your family instead of being reduced by as mush as 55%.
The ILIT becomes the owner of your life policies. Annual exclusion gifts are often made to the policy for the benefit of the trust beneficiaries and then used to pay the policy premiums. These completed gifts allow the policy proceeds to be exempt from estate taxation at death. The proceeds can then be used in full to create liquidity in an estate, pay other estate expenses, or create wealth for loved ones.
Read more about 2011 estate tax laws and ILIT’s here November newsletter