How to Legally Avoid Taxes on Gifts And Inheritances
“Guarding Your Wealth” is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.
(PRWEB) May 23, 2005 -- Nobody likes to pay taxes. If done incorrectly,
though, the way you inherit an asset can result in you needlessly paying tens of
thousands of dollars in taxes. Knowing some simple rules will reduce your tax
bill and allow you to keep more of what you inherit. And it will also keep you
from creating tax headaches for loved ones to whom you wish to gift assets.
Whenever an asset is sold, Uncle Sam wants to collect capital gains tax.
And that tax is figured using cost basis. Cost basis refers to how much money
you invested in a given asset. When sold, the cost basis is subtracted from the
amount received to determine the gain or loss. Your amount of gain or loss then
determines how much you will pay in capital gains tax.
If you buy an
asset for $10,000 and sell it for $25,000, your cost basis is $10,000 and the
taxable gain is $15,000. Currently, the highest capital gains tax rate is 15%,
which means you’d owe capital gains tax of $2,250. Losses can be used to offset
other gains, but we won’t get into that in this article.
Determining the
cost basis can get complicated. If you buy an asset and add money to it, your
cost basis increases. If it’s a mutual fund and you have the dividends
reinvested, that adds to your cost basis. If you sell a portion, that affects
your cost basis as well. This means that it is important to keep track of the
amounts you paid and received on all of your assets.
An asset can be many
things, not only stocks and bonds but also houses, property, jewelry, coins,
artwork, etc. Legally, you are required to pay capital gains tax whenever an
asset is sold at a profit. In fact, 1099’s are issued whenever investments like
real estate, stocks, bonds, and mutual funds are sold.
Here’s where
people lose thousands of dollars. If someone gives you an asset, you ‘inherit’
the giver’s cost basis in that asset. So if mom gives you $10,000 of stock that
she’s owned for years, you inherit her cost basis and are responsible for paying
the capital gains tax on it when you sell it. If she only paid $1,000 for that
stock and you sell it for $10,000 then you will owe taxes on the $9,000
gain.
On the other hand, let’s say you inherited that stock from mom
after her death (through her estate). Then your cost-basis would be the stock’s
market value at that time. This is called ‘stepped-up basis’. So, even if mom
only paid $1,000 for the stock, if it is valued at $10,000 when you inherit it
you can sell it and not owe any capital gains tax. You just legally avoided the
Tax Man!
This stepped-up basis is the government’s way of making up for
people having to pay taxes on the transfer of their wealth. But estate tax laws
are in a state of flux. Under current regulation, the stepped-up basis
disappears in 2011. However, there’s some talk in Congress of doing away with
stepped-up basis altogether, especially since the death tax only affects estates
that are larger than $1,500,000. Most likely, if Congress ends the estate tax
for all but the largest estates, they will collect revenues from smaller estates
by abolishing stepped-up basis.
There are situations where it is better
to have an asset given to you instead of it being inherited. It all depends on
the size of the estate. Death taxes range from 37% to 50%, while capital gains
tax rates are capped at 15%. So if an estate is going to be worth less than
$1,500,000 then there will be less tax paid by inheriting an appreciated asset
through the estate. If an estate will be worth more than $1,500,000 then less
tax will be paid on that appreciated asset if gifted to you prior to
death.
I’ll provide several examples in my next article that will clearly
illustrate real-life situations. That way, you will be able to more easily
determine which course of action you should take and can save thousands of
dollars in the process! There’s no reason to pay tax when you don’t have
to!
I’ll personally answer your financial questions. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’.
In
addition to being a nationally syndicated columnist and Certified Financial
Planning Practitioner, Mr. Voudrie provides personal, private money management
services to clients nationwide.
Looking for an energetic expert who is
passionate about financial and wealth management? Mr. Voudrie is an excellent
speaker who will excite and inspire your audience. Mr. Voudrie is available for
a limited number of speaking engagements, television appearances and radio talk
shows. For booking information, email e-mail protected from spam
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Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth
Article Archive.
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Source : http://www.prweb.com/releases/2005/5/prweb243031.htm