A couple who just turned 60 had paid their mortgage in less than 15 years by adding $500 more each month in payments. Now, they planned well for retirement by moving their 401k into a fixed index annuity that pays until they are 94 and with a base bonus of 20%. The company is number 1 in fixed index annuities and number 2 in risk management. Contact Connie Dello Buono, CA and MI license life agent at 408-854-1883 , connie@connielifeins.com ; http://www.athene.com
There are many ways to protect your principal and to downsize to protect your retirement money. You also wanted to pay less in taxes so that when you want to receive the payout as beneficiary, do choose the 5 year installment for more payment compared to a lump sum.
For more info about fixed index annuities, Contact Connie Dello Buono for a zoom call and an illustration designed for your retirement goals and asset protection. We protect our retirement, income, disability, accident and life with an insurance and fixed index annuity that will provide protection while we are still alive and when we have critical, chronic and terminal illnesss.
Start with a term life insurance with cash back option, plan early before 50. To celebrate your life, get a final expense life insurance for up to 85 yrs old for your family to have money to spend for your burial within 48 hours.
When you receive your lump sum pension from your company, you can move it to Athene fixed index annuity to create a lifetime retirement pension under your control, with death benefits for your beneficiaries, safe, avoids probate, no negative market participation, with 10% bonus using Athene Agility, and other benefits. Text 4088541883, connie@connielifeins.com ; http://www.lifeinsurance4women.com Connie Dello Buono , Lic 0G60621 for details.
At age 61, you are taxed less when withdrawing money from your retirement account. Most of the time, anyone who withdraws from their 401(k) before they reach 59 ½ will have to pay a 10% penalty as well as their regular income tax. However, you can withdraw your savings without a penalty at age 55 in some circumstances.
The IRS allows penalty-free withdrawals from retirement accounts after age 59 1/2 .
At age 72, federal law requires you to withdraw a minimum amount from most retirement savings accounts on an annual basis. You must withdraw from each plan type that is subject to RMDs. There are severe tax penalties for not following RMD rules.
If you wish to allocate a portion of your savings or retirement/pension in a safe Fixed Index Annuity with no negative market participation, text Connie Dello Buono, 0G60621, at 408-8541883 to show you Athene’s annuity products that suits your retirement savings goal of tax less, fees less, avoid probate, safe with no participation in market downturns and more benefits as shown below.
About Connie Dello Buono, Financial Consultant 4088541883 connie@connielifeins.com
Insurance Broker protecting families, seniors and business owners (insurance for life, income, health, retirement, estate and mortgage equity).
Connie Dello Buono is a California Licensed Life and Health Insurance Agent, 0G60621. Serving clients in the bay area, Santa Clara county and the greater bay area communities. Connie started helping seniors with caregivers and with life insurance products that can be used even with health issues.
Life Insurance as asset, life, and retirement income protection
We are focused on helping our clients achieve a secure retirement using fixed annuities and index universal life insurance, a final expense plan using single issue whole life insurance with no medical tests, mortgage protection insurance plans from Americo, AIG, Mutual of Omaha, Transamerica, AIG, John Hancock, American Amicable and 10 more insurance carriers, mostly A rated.
The many riders are important to protect the client during accidental death (doubles the death benefit amount), disability, loss of income/job, terminal/chronic/critical illness or living benefits riders, Return of Premium or cash back, paid up addition and getting back all premiums paid at 100 yrs of age.
Health Care strategist and founder of Motherhealth bay area caregivers
Gather your current financial plan and evaluate your retirement goals. Do you think you will outlive your savings? If yes, text 408-854-1883 for our field underwriter to show you a plan. Do review your current plan with your family, advisors and other pros. Fixed Index Annuities are savings you wanted to keep for at least 10 years and then start withdrawing them and have a lifetime income with death benefits and other benefit riders.
Annuities are insurance contracts that guarantee a fixed or variable payment to the annuitant (the investor) at some future time, usually retirement. Annuities come in different varieties with many different options (called riders) so each annuity works in its own particular way, but there are some general concepts to understand.
Two Phases of Annuities
Generally, Annuities have two phases: an “accumulation” phase and a “distribution” phase.
The Accumulation phase is when the investor’s contributions (called premiums) are made. The contributions can be made in a lump sum or in installments over a period of time.
The Distribution phase is when the investor can withdraw their money. The distribution can also be done in either a lump sum or in payments over a period of time.
Deferred vs. Immediate
When entering an Annuity, you may set the Distribution phase to begin immediately or have the payments delayed to some point in the future. As such, Annuities can be Deferred Annuities or Immediate Annuities. Whether Deferred or Immediate, earnings in the Accumulation and Distribution phases grow on a tax-deferred basis.
Fixed Annuities
In a Fixed Annuity, the insurance company guarantees a fixed payment to the annuitant (investor) for either the lifetime of the investor or for a specified period of time. If an investor dies before their principal has been fully paid out, they may receive only a portion of the monies invested during the Accumulation phase. Essentially, the insurance company insures two risks in offering the Fixed Annuity: the investment risk and the risk of an investor living beyond the principal and interest earned.
To finance a fixed payment over time, a Fixed Annuity must generate interest on the premiums paid. A Fixed Annuity contract typically specifies two levels of interest: a Current Rate and a Minimum Rate. The Current Rate reflects the current interest rates the Fixed Annuity will earn and is guaranteed at the beginning of each calendar year. The Minimum Rate is the minimum interest rate the insurance company will guarantee if the Current Rate falls. Minimum Rates are determined by states. Utah currently requires a minimum of 3 percent.
As the principal and interest is guaranteed by the insurance company, the risk of a fixed annuity is entirely based on the financial health of the company selling the Fixed Annuity.
Variable Annuities
Variable Annuities differ in that their rate of return is based on an underlying securities portfolio or other index of performance (called a subaccount). That means that the value of the Variable Annuity contract itself may rise or fall with the stock market. Not only does this affect earnings in the Accumulation phase and payments during the Distribution phase, but also presents the risk that the Variable Annuity loses money.
Variable Annuities are often sold by comparing them to a mutual fund, but focusing on the features that Variable Annuities offer and mutual funds do not. These selling points include:
Tax-Deferred Earnings — While market gains in the subaccount are not taxed until the Distribution phase, other types of investment accounts offer the same tax advantage. A Traditional or Rollover IRA also holds securities (e.g. mutual funds, stocks, bonds) and defers taxes until distributions are made.
Death Benefit — Similar to insurance products, most Variable Annuities include a death benefit, which allows a designated beneficiary to receive a certain amount upon the annuitant’s death. That amount is often the greater of either: all the money in the account, or some guaranteed minimum (e.g. all premiums paid minus withdrawals taken). Sometimes riders are available to elect a “stepped-up” death benefit. Remember, that any death benefit guarantee is only as good as the insurance company that gives them.
Payout Options / Guaranteed Income for Life — As its name implies, a Variable Annuity’s rate of return is not stable, but varies with the investment options in the subaccount. There is no guarantee that an investor will earn any return on their investment and there is a risk that they will lose money. Because of this risk, variable annuities are securities registered with the Securities and Exchange Commission (SEC).
Other Riders — Variable Annuities are often sold with a number of add-on options (riders) that provide specific benefits. Be aware that these special features may result in additional charges to the investor in the overall annual fees and expenses of the annuity contract.
Equity-Indexed Annuities
Equity-Indexed Annuities are complex financial instruments that combine elements of both Fixed and Variable Annuities. The return on an Equity-Indexed Annuity varies more than a Fixed Annuity, but varies less than a Variable Annuity. So the risk for Equity-Indexed Annuity is somewhere between a Fixed and Variable Annuity.
Equity-Indexed Annuities combine a minimum guaranteed interest rate with another interest rate linked to a market index. The minimum guaranteed interest rate is typically a modest amount and a market index is the combined result of a number of stocks representing a specific segment of the market or the market as a whole. So while the market component of the Equity-Indexed Annuity still creates a risk (and potential losses), the minimum guaranteed interest rate may offset that risk somewhat. However, the minimum guaranteed interest rate may not even cover the costs of the surrender charges, rider expenses, and tax penalties if the investor needed to cash out their Equity-Indexed Annuity.
Regulation of Annuities
Fixed Annuities are not securities and are not regulated by the Utah Division of Securities or the Securities and Exchange Commission (SEC). Fixed Annuities are insurance products regulated by the Utah Department of Insurance.
Variable Annuities are securities regulated by the SEC. The individual sales agents should be licensed both as an insurance agent with the Utah Department of Insurance and as a broker-dealer agent with the Utah Division of Securities.
Equity-Indexed Annuities combine features of traditional insurance products (guaranteed minimum return) and traditional securities (return linked to the stock markets). Currently, Equity-Indexed Annuities are deemed to be a Fixed Annuity in Utah and are regulated by the Utah Department of Insurance, not the Utah Division of Securities. However, the SEC evaluates Equity-Indexed Annuities on a case-by-case basis and may regulate them as securities depending on the mix of features. Proposed legislation may change the way Utah regulates Equity-Indexed Annuities in the coming years.
Free Look Period
Annuity contracts typically have a “free look” period of ten or more days, during which you can terminate the insurance contract without paying any surrender charges and receive a return of your purchase payments (which may be adjusted to reflect charges and the performance of your investment). You can continue to ask questions in this period to make sure you understand your Annuity before the “free look” period ends.
First, you can use a tax-protected retirement account to avoid paying capital gains taxes on the proceeds from your stock sales. As long as you keep the proceeds in the account and resist the urge to make premature withdrawals, you can grow your retirement savings on a tax-free basis for an indefinite period of time.
However, your retirement account may be subject to certain contribution limits. If you’re under the age of 50, you can contribute just $5,000 per year into your tax-protected IRA account. If you’re over the age of 50, you may be able to contribute as much as $6,000 into your account. Before you make any contributions, be sure to check with a licensed tax professional.
If you’re trading stocks in a U.S.-based traditional brokerage account, you’ll almost certainly be required to pay capital gains on your earnings. For tax purposes, “capital gains” are defined as the profits produced by the sale of a given stock. Although the tax rates on capital gains fluctuate from year to year, it’s safe to assume that you’ll need to forward at least 15 percent of your profits to the IRS.
Since “short-term” capital gains are taxed at higher rates than “long-term” capital gains, you may wish to avoid selling stocks that you’ve held for fewer than 12 months. It’s also crucial to note that dividends are taxed as regular income. When you calculate your total investment-related earnings at tax time, you’ll need to account for your capital gains and dividend earnings separately.
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Although some investors may be able save big on capital gains taxes for the next 3 years, only a few will be so blessed. If you’re at, or close, to the bottom of the income ladder, you’ll be able to save 100% on your capital gains taxes. Those eligible for the savings aren’t the ones in the 15% capital gains tax bracket. If you are currently paying 5% on capital gains, you’ll be able to forego chipping in for a while, but you have to do your homework first. Remember, there are long term capital gains and short term capital gains. Short term capital gains are those from investments held less than 12 months. These are taxed at your income tax rate, which is almost always greater than the capital gains tax rate.
The bad news is that, unless the lower tax rates are extended by congress, they’ll revert to where they were in 2003. That means you’ll go from paying no capital gains taxes to vaulting right past the 5% rate, and jumping up 100% to 10%. If you’re single and earn over $31,850 in 2007 (more for 2008), you’re ineligible for the 0% tax rate. You’ll be stuck paying the higher 15% capital gains taxes. The income level is effectively less than $31,850 because the sale of stock bonds and mutual funds will generate income that’s added to your other earned income. Together, the combined dollar amount can easily be over $31,850.
Other Ways to Save
Capital gains taxes will be owed any time you sell a highly appreciated asset, weather it’s a collector car, investment portfolio or real estate. In addition, you’ll have to pay capital gains taxes on the sale of your business. The last one really hurts. You work hard for decades, put in blood, sweat, and tears, and then owe the government around 25% of the profits on the sale.
Capital Gains Tax Savings Strategy #1
To avoid paying capital gains taxes on a piece of real estate, you must live in it as your primary residence for at least 2 years. If you’re single or married and filing separately, you’ll get to exclude $250,000 of capital gains on that property. If you are married and file jointly, the exclusion jumps to $500,000. That works great for single family residences, but that strategy is harder to apply to commercial property or multi-family complexes.
The one thing that may people fail to realize is that it doesn’t matter when the property appreciates, as long as it is the primary residence for at least 2 of the last five years of ownership. This means you could buy a house then live in it for 2 years and sell it, or buy a house, rent it out for 3 years, move into it for 2 years and then sell it. There are many combinations that would qualify. If you owned 2 or more properties, you could live in one of them for two years, sell it and move into another for 2 more years, sell that one and move into another of your properties.
Capital Gains Tax Savings Strategy
One Time honored strategy to defer capital gains taxes is through the use of a irrevocable domestic non-grantor trust. Such a trust is a legal entity that will allow you to defer capital gains taxes according to IRS supplied mortality tables. For domestic trusts, this time period can be up to 20 years and for international trusts, the time period can be up to 30 years. This is a vehicle that requires an advisor well versed in all its idiosyncrasies. Such tax deferment vehicles are extremely complex, yet very effective. When done correctly, these trusts will also allow you to defer not only capital gains, but also all income taxes on reinvested assets. An additional benefit is the possible elimination of inheritance and transfer taxes.
Capital Gains Tax Savings Strategy #3
You have to plan for your capital gains taxes in order to properly, and legally defer or avoid them. Often a good plan hinges on legal structures that must be in place before you make your gains. In addition, you can make decisions that, once made, cannot be undone and can cause you to be facing a hefty IRS payment. This definitely applies when deciding on a time to sell or convert assets.
For example, if you have a large block of stocks or funds purchased at various times throughout the past few years, you may sell a portion of them. If you inadvertently sell assets purchased recently, rather than those purchased farther back, you can be facing a hefty tax bill. To avoid this being treated as a short term capital gain you must notify your broker of your intention to divest yourself of a block purchased farther in the past. The broker must be notified before you place your sell order, unless you’d rather pay income tax, rather than be liable for capital gains taxes, which are not only lower, but can then be deferred according to your capital gains tax strategy.
Capital Gains Tax Savings Strategy #4
Doubling down refers to the practice of repurchasing a stock after selling it at a loss for tax purposes. If you have an unrealized loss, but feel the stock is sound, and will turn around, you can sell it and take the loss for the purposes of reducing your capital gains taxes. You must then wait more than 30 days before you repurchase it to avoid the sale being termed as a “wash sale”. A wash sale is when an investor sells an investment only to repurchase it again within 30 days. In such cases you must deferred and, to make matters worse, the cost basis of the investment is raised to reflect the new amount. This can easily cause you to lose out on a loss you were counting on to reduce your tax liability.
Capital gains taxes are a very complicated subject. There are some very effective tax reduction, avoidance, and deferment strategies available that apply to capital gains taxes, most of which are not mentioned here. They are best left to experts in this specific field.
For most taxpayers, there’s no change to their ordinary income and capital gains rates. But tax rates for high earners have increased, including:
A new top marginal tax rate of 39.6% (it was 35% in 2012) on income above $400,000 for singles and $450,000 for married couples filing jointly
A new 20% tax rate on capital gains and qualified dividends (it was 15% in 2012) for taxpayers who are in the 39.6% marginal tax bracket
High-income taxpayers are also subject to limits on exemptions and deductions in 2013. The income threshold for the Pease and PEP (personal exemption phaseout) limitations is $300,000 in adjusted gross income (AGI) for joint filers and $250,000 for singles. The Pease limitation reduces the value of charitable contributions; mortgage interest; state, local, and property taxes; and miscellaneous itemized deductions. For 2013, this limitation is the lesser of 3% of AGI above the threshold up to 80% of the amount of the itemized deductions otherwise allowable. The PEP limitation reduces the total personal exemption by 2% for every $2,500 of income above the same income thresholds with no upper limitations. That means it’s possible for some taxpayers to completely phase-out of their personal exemptions.
Changes to the estate and gift tax structure are minimal. The federal estate exclusion will be adjusted for inflation going forward and is currently $5,250,000 in 2013, (up from $5 million in 2012) and the top rate on amounts above the exemption has been raised to 40%, from 35%.
In addition, tax provisions included in the Affordable Care Act went into effect in 2013. Specifically, taxpayers with modified adjusted gross income (MAGI) above $200,000 for singles and $250,000 for couples may owe:
An additional Medicare tax of 0.9% on income for those with MAGI above the thresholds
A Medicare surtax of 3.8% on the lesser of net investment income or MAGI above the thresholds
Also, legally-recognized same-sex marriages are now recognized for federal income tax purposes and Medicare benefits, after the U.S. Supreme Court struck down a key section of the federal Defense of Marriage Act (DOMA). Every same-sex legally married couple should examine their individual situation to determine the impact of various filing statuses on the amount of tax they will owe.
How can you be more tax efficient in light of these changes? Let’s take a look at some tax strategies to consider by the end of the year.
Strategy 1: Reduce income
The simplest way to lower current-year taxes is by contributing to a 401(k), 403(b), governmental 457, traditional IRA, Simplified Employee Pension (SEP) plan, or other type of qualified retirement savings plan. Qualified contributions reduce your taxable income.
Consider contributing as much as you can to a 401(k), or at least enough to receive your full employer match—if one is offered. For 2013, the contribution limit increased by $500, to $17,500 if you’re under age 50, and to $23,000 if you’re age 50 or older.
Next, make a tax-deductible contribution to a traditional IRA, if you qualify. For 2013, the limits for tax deductibility are up to $59,000 in AGI for full deductibility if single and up to $95,000 for full deductibility if married, filing jointly; from $59,000 to $69,000 for partial deductibility if single, and from $95,000 to $115,000 for partial deductibility if married, filing jointly. In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $178,000 for 2013; partial deductibility for MAGI up to $188,000. Contribution limits have increased for 2013 to $5,500 for taxpayers under 50, and $6,500 for those 50 and older. Self-employed individuals with a SEP, meanwhile, can contribute up to $51,000 or 20% of their adjusted earned income for 2013.
If you are still working, not using Medicare, and are enrolled in a high-deductible health plan (HDHP), another way to reduce taxable income is by contributing to a Health Savings Account (HSA). In 2013, you can contribute up to $3,250 annually as an individual, or $6,450 as a family. And if you’re age 55 or older, you can save an extra $1,000. Contributions are pretax and qualified withdrawals are also income tax free. Some employers are contributing to these accounts on behalf of their employees.
Strategy 2: Manage capital gains and dividends
Minimizing exposure to the capital gains tax is even more important for some taxpayers, given the increase in the top rate to 20%, along with the new 3.8% Medicare surtax on net investment income. Taxpayers in the highest income tax bracket could owe as much as 23.8% in tax on their net investment income.
Be careful when selling highly appreciated assets, such as stocks, land, fine art, precious metals (including certain ETFs that invest in them), or antiques. Some of these are taxed as collectibles and are subject to higher capital gains taxes. A large capital gain could push you into a higher marginal income tax rate.
No matter what rate you pay, tax-efficient investing can be a smart strategy. One popular method for reducing taxable income is investing in municipal bonds or municipal bond funds whose earnings are not subject to federal tax. There are even municipal bond funds that seek to avoid exposure to the alternative minimum tax (AMT) as well. Another option is to consider tax-managed funds that keep capital gains and dividend payouts low.
Tax-loss harvesting is another possibility. If your investments have done well this year—as many investors’ have—you might want to consider selling securities that have lost value to help reduce capital gains elsewhere in your portfolio. If you end up with more capital losses than gains, you can use the remaining losses to offset ordinary income by up to $3,000, or you can carry them forward to offset capital gains and ordinary income in future years.
Be careful, however, not to put your desire to lower your taxes ahead of sound investing strategy. Typically, you should harvest losses only from depreciated assets that you were considering selling anyway, perhaps because they no longer fit into your diversified portfolio or because you anticipate that they will continue to decline in value. Here’s a hypothetical example. John is in the 15% capital gains tax bracket and has a long-term capital gain of $5,000 in Investment A, and a long-term capital loss of $3,000 in Investment B. Because, he can offset the $5,000 gain with a $3,000 loss, his net long-term gain on the sale of Investment A and Investment B is only $2,000, with a $300 federal capital gains tax. If he did not have the loss, the tax on his $5,000 long-term gain would be $750.
Strategy 3: Be charitable
Another way to reduce your taxable income is to give to charity. It could be even more valuable if you donate highly appreciated assets that you have owned for at least a year. You could claim the current fair market value as a tax deduction (up to the allowable limits) without having to realize the gain as income on your tax return.
This is a hypothetical example for illustrative purposes. Chart assumptions: Donor is in the 39.6% federal income bracket with an AGI of $500,000. State and local taxes, the federal alternative minimum tax, and limitations to itemized deductions applicable to taxpayers in higher income brackets are not taken into account. Assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%. Does not take into account state or local taxes, if any. Availability of certain federal income tax deductions may depend on whether you itemize deductions. Charitable contributions of capital gains property held for more than one year are usually deductible at fair market value. Deductions for capital gains property held for one year or less are usually limited to cost basis. Please consult your tax adviser regarding your specific legal and tax situation. Information herein is not legal or tax advice.
Consider this hypothetical example (shown in the chart to the right). Bill and Margaret own securities with long-term unrealized gains. They need to decide which giving strategy will work best: giving the securities directly to the charity (Scenario 1) or selling the securities and donating the proceeds to charity (Scenario 2). Let’s compare the potential tax benefits of each side by side.
If they sell the securities first, Scenario 2, and then donate the proceeds to charity, Bill and Margaret will pay a federal long-term capital gains tax of $7,140.
Now let’s look at what happens if they give their securities directly to their favorite charity (Scenario 1). With a direct donation to charity, the capital gains tax from selling the securities no longer applies. Bill and Margaret’s federal income taxes are reduced by an extra $9,967 and the charity receives an additional $7,140. Bill and Margaret will usually save more in taxes and do more good for their designated charity if they donate appreciated securities, instead of cash. On the flip side, if these long-term securities were at a loss, it might be better to sell the security first, realizing a loss (which could be used to offset future gains or income), and donate the proceeds as cash to potentially receive a charitable deduction.
A donor-advised fund, or DAF, enables you to maximize the allowable tax benefits and create a reserve of money that you can use now and ongoing to support charitable causes. For example, if you’re fortunate enough to have high capital gains or particularly high income in 2013—for a bonus, sale of a business, or Roth IRA conversion, for instance—you could contribute a large lump sum to a DAF (including a highly appreciated asset) to claim the tax-lowering charitable contribution this year, then have the fund spread out distributions to the charities of choice on a timetable that works for you.
If you’re age 70½ or older, another charity-related tax strategy to pay attention to this year is a provision that allows IRA owners to make a tax-free distribution to a qualified charity. Under current law, this provision will expire at the end of 2013, so you might not have another opportunity. Many retirees find this to be an attractive strategy because they claim the standard deduction rather than itemizing, which means they don’t typically receive a tax benefit for their charitable contributions. Plus, qualified distributions, up to $100,000, can count as a retiree’s minimum required distribution for the year. (Note: You cannot donate a tax-free IRA distribution to a DAF.)
Strategy 4: Bunch and accelerate deductions
Several significant deductions that are on the books for 2013—but not beyond—include:
State sales tax deduction in lieu of state income tax deduction. This is popular in states with low or no state income tax.
Exclusion for debt forgiveness on foreclosed homes. Homeowners who were caught up in the foreclosure crisis are allowed to exclude up to $2 million (couples) or $1 million (singles) in debt that was forgiven on their principal residence.
Educator expense deduction. Qualified educators are allowed to deduct up to $250 in unreimbursed expenses for books, supplies, and other materials used in their classrooms.
Residential energy property credit. You may claim a tax credit of 10% of the cost of qualified energy-saving improvements to your principal residence.
Although they’ve been renewed before, there’s no guarantee that these provisions will continue to be available. You may want to consider taking these deductions for 2013. For example, if you take advantage of the sales tax deduction and you know you’re going to be making a major purchase in the next few months, you might want to do so before the end of the year. Or if you’re in the middle of a foreclosure proceeding, you should do what you can to ensure that it’s completed in 2013.
In the past, only your medical expenses that exceeded 7.5% of AGI were deductible, but that increased to 10% for this year, making the deductibility threshold harder to reach. There is an exception, however. People age 65 and older can continue to deduct medical expenses that exceed the 7.5%, through 2016.
Strategy 5: Use your annual gift tax exemption
If you’re looking for ways to help your children or other family members, you may want to consider several gifting options to help reduce or avoid federal gift and estate taxes. An individual can give up to $14,000 a year to as many people as you choose ($28,000 if you and your spouse both make gifts) to help reduce the amount of your estate. This may include cash, stocks, bonds, and portions of real estate. This is your annual gift tax exemption, and you can also give a separate $5.25 million, per person, over the course of your lifetime or at death, free from gift or estate taxes. However, anything above $14,000 per person per year may be subject to gift taxes, so it’s important to keep track of this information. Separately, you can pay college tuition costs or eligible medical expenses directly for someone else and avoid having those amounts count as a taxable gift. For more information, speak with your tax adviser and review IRS Publication 950, Introduction to Estate and Gift TaxesOpens in a new window..
If you would like to contribute money toward your child’s education, consider a 529 plan account. You can contribute up to $14,000, the annual gift tax exemption, to the account as a single filer, or $28,000 for a married couple filing jointly. Your contributions are generally considered to be removed from your estate, even though you control the assets and their distribution. There are also accelerated transfers available, whereby you can contribute up to $70,000 (for single filers) or $140,000 per married couple. This “front-loaded” contribution can be spread out over five years for tax purposes. You can also make a payment directly to an educational institution and pay no gift tax.1 And with 529 plans, you have the flexibility to change the account beneficiary. So if a particular child decides not to attend college, you as the account owner can change the beneficiary to a sibling, cousin, or other qualified family member.
Make your moves before December 31, 2015
There have been many significant and permanent changes to the federal tax code for 2013, so don’t wait until it’s too late to implement strategies that can potentially save you money when you file your 2013 tax return. A key is to work with professionals who understand how the new provisions affect your personal and financial situation.
Capital gains (the money made from selling a non-inventory asset like stocks, bonds, property, and precious metals at a profit) are often taxed at fairly high rates — especially if you already have a high income. For instance, in the United States, people with very high incomes (over $400,000 for single, $450,000 for married filing jointly) can expect to pay a 20% capital gains tax.[1] Many states add additional taxes on top of this base federal rate. Luckily, there are several ways to avoid some or even all of your capital gains tax. Usually, these involve putting enough of your money in a tax-safe investment so that you get some use out of your money rather than having to give it to the government.
Method 1 of 3: Redirecting Your Income
1Put more of your income into retirement accounts. Most reputable retirement accounts are tax-exempt or tax-deferred — that is, you either don’t pay taxes on money you put into the account or you only have to pay them once you start withdrawing money from the account after you retire.[2] In either case, capital gains you funnel into a retirement account won’t be taxed immediately. For tax-deferred accounts, though you will eventually have to pay taxes, they will probably be lower than you initially would have had to pay (assuming your retirement income + withdrawals from your retirement account amounts to an income in a lower tax bracket).
Note, however, that most retirement accounts have a limit to how much you can add. For instance, a traditional 401k has a deposit limit of $17,500 per year.
Open a college savings account. If you’re interested in saving for a child or grandchild’s education while simultaneously avoiding capital gains tax, a college savings account is the way to go. 529 college savings plans operate on a tax-deferred basis like many retirement accounts. As an added bonus, they don’t usually have a regular contribution limit like most retirement accounts do. Instead, they have a lifetime maximum amount — usually at least $200,000.[4]
3Put your money in a health savings account. Health savings accounts (HSAs) are just what they sound like — savings accounts that allow people to save for future medical expenses. Usually, money in these accounts is tax-exempt if it’s withdrawn for medical purposes, making these a great choice for people looking to avoid capital gains. However, HSAs usually have several qualifying conditions that a person looking to open an account must meet. These usually include:[5]
Having a qualifying high-deductible health insurance plan
Put your assets in a charitable trust. For someone with a highly-valuable asset subject to appreciation (like, say, a collection of fine antiques), charitable trusts offer a great way to avoid paying capital gains on the sale of the asset. Generally, in this case, you give the trust your valuable asset, then the trust sells it for you. Because charitable trusts are tax-exempt, they don’t have to pay capital gains taxes on the sale of the asset. After this, the trust pays you a certain percentage of the cost of the asset each year for an agreed-upon amount of time. After this, the money left over goes to charity.[6]
To be clear, this method may not earn you as much money as you might from selling the asset yourself and keeping all of the money, even after taxes. However, it does ensure that all of the money from selling the asset is split between you and a charity of your choice, rather than going to the government.
Method 2 of 3: Avoiding Taxes on General Gains
Hold on to your stocks. Capital gains result when you sell capital assets at a greater price than what you bought them for. If you don’t sell your assets, you don’t have to pay any tax. So, if you’re thinking of selling some stocks, always remember that you have the option to hold onto them until a later date. [7]
By waiting to sell, there’s a possibility that you may be able to get a better price for the stocks in the future. However, it’s also possible that the price of the stocks may decline over time.
2Make gifts to family members. Every year, you are allowed to give $14,000 in tax-excluded gifts per individual recipient. If you give valuable stock to a trusted family member like a parent, child, or sibling, they can sell it for you and consequently pay as little as 0% in capital gains taxes (as long as their income puts them in a low tax bracket).[8]
Obviously, you’ll only want to use people that you absolutely trust. Giving someone stock or assets as a gift gives them legal possession of them, so, if there’s any doubt in your mind about whether someone will give you your money back, choose someone else.
3“Harvest” losing stocks. In some situations, selling a stock for a short-term loss can actually save you money in the long term by reducing the amount of money you pay in capital gains taxes overall. This is called “harvesting” your loss. For instance, if someone invests $10,000 in one company’s stocks and the stock soon falls to $9,000, they may decide to sell, taking the $1,000 loss. Then, they will re-invest this money into a different stock. However, they can still use this $1,000 to offset other gains on their tax return. If the second stock does well, it’s possible to have a greater return rate on your initial investment than you would have had by simply buying one stock and waiting for it to recover.[9]
Note, however, that the IRS has enacted certain financial rules that can make this process difficult. For instance, your initial loss is disallowed if you use the money from the sale to purchase a very similar asset within 30 days
Leave capital to others in your will. If you are elderly and have no immediate need for the capital you have accumulated, you may want to consider leaving it to a loved one in your will. When inherited capital is sold, the fair market value at the time of your death is used as the basis for any capital gains . Thus, the only gains that are taxable are the increases in value after the date of death. These gains can often be minimal, especially if the assets are sold soon after death.
Move to a tax-friendly state. As noted above, the base federal rates for income taxes are the same for every American and vary based on your taxable income. However, many states include their own capital gains taxes on top of the base federal tax. To minimize the amount of money that you have to pay in taxes, moving to a state with a lower state-level capital gains tax (or none at all) can be a smart long-term option. Though the process of moving to a different state can require a serious investment of time and money, it may make sense for people who stand to make a great deal of money from capital gains over the course of their life.
Seven states have no additional taxes on top of the federal rate: Alaska, Florida, South Dakota, Tennessee, Texas, Washington and Wyoming. California has the highest rate of any state, with a top rate of about 37%.
Method 3 of 3: Avoiding Taxes on Property
Use a like-kind exchange on property worth more than the depreciated value.If you sell property for more than the depreciated value, you will pay capital gains tax on the difference between the depreciated value and the sale price. However, you can use a like-kind exchange at the higher value of the property to avoid capital gains tax. For example, if you have used equipment worth $5,000, but the depreciated value of the equipment is only $3,000, you can trade it in for $5,000 to buy new equipment, instead of selling it outright and paying capital gains tax on the $2,000 difference.
Exclude capital gains on the sale of residential property.Individuals or families selling their primary place of residence may be exempt from paying taxes on much (or even all) of the money made from the sale of the home. Using this strategy, an individual can exclude up to $250,000 in capital gains, while a couple filing jointly can exclude up to $500,000. However, to be eligible for this sort of exemption, you must meet certain ownership requirements: [12]
You must have owned the residential property for a minimum of 2 years.
You must have occupied the property as your primary residence for at least 730 days (2 years), which don’t need to be consecutive, during a 5-year period prior to the sale. You are allowed to rent the residence during the period that you don’t live in it.
During the 2-year period prior to selling the property, you must not have excluded the gain on the sale of another home.
Invest in property improvements.Certain eligible home improvement projects used to get a home in selling shape can be used to reduce (or even eliminate) the capital gains tax on the sale of a home. These IRS-approved projects can effectively count against the sale price of the home, reducing the amount of money you owe in capital gains taxes. If the combined cost of these property improvements makes the effective price of the sale less than $500,000 for couples filing jointly or $250,000 for individuals, no capital gains taxes need to be paid at all. Approved expenses are listed in IRS publication 523 and usually include:[13]
Tips:
Military personnel and people in certain other specified government positions, who must live elsewhere for work, may have difficulty meeting the 2-year use test during a 5-year period. Therefore, these people have the ability to suspend the 5-year period while they are away for up to 10 years.
If you don’t meet the requirements of the ownership test and use test to avoid capital gains tax on the sale of residential property, you may be able to claim a partial exclusion if you were to sell due to unforeseen circumstances, such as a change in job location or health.
Caution:
If you leave a large estate to others in your will, there may be inheritance tax due at the date of death.
