The following is a sample quote Single Issue Whole Life Insurance for Final Expense from Mutual of Omaha, Living Promise, for a 63 yr old female, non smoker who wanted a final expense plan to pay for burial/funeral expense and leave some estate to her 2 children. Death benefit is $40,000 with monthly premium of $141.26. Health issue: 1 prescription med for hypertension. Healthy weight. Works night shift.
Her goal is to not burden her two daughters should the good Lord calls her. She has been supportive to her family, buying her grandchildren essentials from stroller to clothes.
Working hard during night shift as a CNA in a nursing home, she offers sacrifices to benefit the future of her grandchildren and children.
Car: Riding a bike or bus to work. Think of saving the car insurance and cost of gas for years before buying your dream car.
House: Settling for a room to rent or mobile home or community house sharing. Think Income first before Spending. This means buying a fourplex as your first home or a house that you can rent out first and own the second or third house while maintaining the rental homes. Know capital gains and ways to control them thru sound investing and business structuring.
Emergency Fund for unforeseen events like car repairs, college teens, lost job or lost opportunity. Cutting on stuff that you want to cut back on like expensive vacations to fatten your emergency funds first.
Emotional about spending, mortgage worries. The reality of being debt-free is more important than joining or copying the Joneses. Buying stuff second hand.
Saving in your net worth personal banking , be it in your bank savings account, cash value life insurance, managed stock savings/account, bonds, others.
Negotiate everything or trade/barter services for stuff.
Challenge Are you getting value in your gym membership?
Marry someone with same level of ambition, personal finance habits and enterprenueral spirit as you.
Walk your talk when guiding your children about finances. Allow them to work during summer break or school break to learn the value of money. Use a revocable living trust to transfer assets to them.
Take care of your health for in the end, when your health fails you might end up selling your houses to pay for nursing home. Health first and then wealth Or move to other countries or cities to downsize and afford retirement.
Use a business structure and financial strategy to write off most of your expenses and save the extra when you minus your lifestyle from your gross income. For this one, contact Connie Dello Buono to help you reduce your income tax using a business structure and financial strategy at 408-854-1883 email@example.com , firstname.lastname@example.org
Donate your real estate to the following charities: Motherhealth Inc for affordable senior care and Green Research Institute for sustainability at 1708 Hallmark Lane San Jose CA 95124. Contact Connie Dello Buono.
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.
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. 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. 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.
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:
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.
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. 
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).
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.
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: 
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:
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.
If you leave a large estate to others in your will, there may be inheritance tax due at the date of death.
If you give people a lot of money, you might have to pay a federal gift tax. But the IRS also allows you to give up to $14,000 in 2013 to any number of people without facing any gift taxes, and without the recipient owing any income tax on the gifts.
Why it pays to understand the federal gift tax law
If you give people a lot of money or property, you might have to pay a federal gift tax. But most gifts are not subject to the gift tax. For instance, you can give up to the annual exclusion amount ($14,000 in 2013) to any number of people every year, without facing any gift taxes. Recipients generally never owe income tax on the gifts.
In addition to the annual gift amount, your can give a total of up to $5.25 million starting in 2013 in your lifetime before you start owing the gift tax. If you give $16,000 each to ten people in 2013, for example, you’d use up $20,000 of your $5.25 million lifetime tax-free limit—ten times the $2,000 by which your $16,000 gifts exceed the $14,000 per-person annual gift-free amount for 2013.
The general theory behind the gift tax
The federal gift tax exists for one reason: to prevent citizens from avoiding the federal estate tax by giving away their money before they die.
The gift tax is perhaps the most misunderstood of all taxes. When it comes into play, this tax is owed by the giver of the gift, not the recipient. You probably have never paid it and probably will never have to. The law completely ignores gifts of up to $14,000 per person, per year, that you give to any number of individuals. (You and your spouse together can give up to $28,000 per person, per year to any number of individuals.)
If you have 1,000 friends on whom you wish to bestow $14,000 each, you can give away $14 million a year without even having to fill out a federal gift-tax form. That $14 million would be out of your estate for good. But if you made the $14 million in bequests via your will, the money would be part of your taxable estate and, depending on when you died, might trigger a large estate tax bill.
The interplay between the gift tax and the estate tax
Your estate is the total value of all of your assets, less any debts, at the time you die. The new rules for 2013 will tax estates over $5.25 million at rates as high as 40%. That $5.25 million is an exclusionmeaning the first $5.25 million of your estate does not get taxed.
So why not give all of your property to your heirs before you die and avoid any estate tax that might apply? Clever, but the government is ahead of you. As noted above, you can move a lot of money out of your estate using the annual gift tax exclusion. Go beyond that, though, and you begin to eat into the exclusion that offsets the bill on the first $5.25 million of lifetime gifts. Go beyond the $5.25 million and you’ll have to pay the gift tax—at rates that mirror the individual income tax, up to 40% in 2013.
The basic tax basis issue
As you consider making gifts, keep in mind that very different rules determine the tax basis of property someone receives by gift versus receives by inheritance. For example, if your son inherits your property, his tax basis would be the fair market value of the property on the date you die. That means all appreciation during your lifetime becomes tax-free.
However, if he receives the property as a gift from you, his tax basis is whatever your tax basis was. That means he’ll owe tax on appreciation during your life, just like you would have if you sold the asset yourself. The rule that “steps up” basis to date of death value for inherited assets saves heirs billions of dollars every year.
A tax basis example
Your mother has a house with a tax basis of $60,000. The fair market value of the house is now $300,000. If your mother gives you the house as a gift, your tax basis would be $60,000. If you inherited the house after your mother’s death in 2013, the tax basis would be $300,000, its fair market value on the date of her death. What difference does this make? If you sell the house for $310,000 shortly after you got it:
Your gain on the sale is $250,000 ($310,000 minus $60,000) if you got the house as a gift.
Your gain on the sale is $10,000 ($310,000 minus $300,000) if you got the house as an inheritance.
What is a gift?
For tax purposes, a gift is a transfer of property for less than its full value. In other words, if you aren’t paid back, at least not fully, it’s a gift.
In 2013, you can give a lifetime total of $5.25 million in taxable gifts (that exceed the annual tax-free limit) without triggering the gift tax. Beyond the $5.25 million level, you would actually have to pay the gift tax.
Gifts not subject to the gift tax
Here are some gifts that are not considered “taxable gifts” and, therefore, do not count as part of your $5.25 million lifetime total.
Present-interest gift of $14,000 in 2013. “Present-interest” means that the person receiving the gift has an unrestricted right to use or enjoy the gift immediately. In 2013 you could give amounts up to $14,000 to each person, gifting as many different people as you want, without triggering the gift tax.
Gifts to a spouse who is a U.S. citizen. Gifts to foreign spouses are subject to an annual limit of $143,000 in 2013. This amount is indexed for inflation and can change each year.
How gifts to minors are taxed
If you give an amount up to $14,000 to each child each year, your gifts do not count toward the $5.25 million of gifts you are allowed to give in a lifetime before triggering the gift tax. But what counts as a gift to a minor?
Gifts made outright to the minor
Gifts made through a custodial account such as that under the Uniform Gifts to Minors Act (UGMA), the Revised Uniform Gifts to Minors Act, or the Uniform Transfers to Minors Act (UTMA)
Note: One disadvantage of using custodial accounts is that the minor must receive the funds at maturity, as defined by state law (generally age 18 or 21), regardless of your wishes.
A parent’s support payments for a minor are not gifts if they are required as part of a legal obligation. They can be considered a gift if the payments are not legally required.
Example: A father pays for the living expenses of his adult daughter who is living in New York City trying to start a new career. These payments are considered a taxable gift if they exceed $14,000 during 2013. However, if his daughter were 17, the support payments would be considered part of his legal obligation to support her and, therefore, would not be considered gifts.
Advantages of making a gift
Giving a gift may earn you more than gratitude:
Reduced estate taxes. Moving money out of your estate via lifetime gifts can pay off even if those gifts trigger the gift tax. How? By removing future appreciation on the asset from your estate. Say, for example, that you give your daughter real estate worth $5,264,000, using up your $14,000 exclusion and your entire $5,250,000 2013 lifetime gift exclusion. If the property is worth $7,014,000 when you die, that’s $1,750,000 less to be taxed in your estate.
Reduced income taxes. If you give property that has a low tax basis (such as a rental house that has depreciated way below its fair market value), or property that generates a lot of taxable income, you may reduce income taxes paid within a family by shifting these assets to family members in lower tax brackets.
Teaching your family to manage wealth. Giving family members assets now allows you to monitor their ability to handle their future inheritance.
Disadvantages of making a gift
Reduces your net worth. You need to keep enough assets to care for yourself throughout a long or extended retirement or illness.
The Kiddie Tax. Giving funds to children may subject them to the Kiddie Tax, which applies the parents’ tax rates to investment earnings of their children that exceed a certain amount. For 2013, the Kiddie Tax applies to investment income exceeding $2,000 for a child under age 19.
How to report and pay the gift tax
If you make a taxable gift, you must file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return, which is due April 15 of the following year. Even if you do not owe a gift tax because you have not reached the $5.25 million limit, you are still required to file this form if you made a gift that exceeds the $14,000 annual gift tax exclusion level. The IRS needs to keep a running tab of your lifetime exemption.
In 2013, you give your son $15,000 to help him afford the down payment on his first house. This is a gift, not a loan. You must file a gift tax return and report that you used $1,000 ($15,000 minus the $14,000 annual exclusion) of your $5.25 million lifetime exemption.
Same facts as above, except that you give your son $13,000 and your daughter-in-law $2,000 to help with the down payment on a house. Both gifts qualify for the annual exclusion. You do not need to file a gift tax return.
Same facts in Example 1, but your spouse agrees to “split” the gift—basically this means he or she agrees to let you use part of his or her exclusion for the year. One spouse, for example, could give $28,000 to his son without triggering the gift tax if the other spouse agrees not to give the son any gift that year. Although no tax is due in this situation, the first spouse would be required to file a gift tax return indicating that the second spouse had agreed to split the gift.
On a gift tax return you report the fair market value of the gift on the date of the transfer, your tax basis (as donor) and the identity of the recipient. You should attach supplemental documents that support the valuation of the gift, such as financial statements in the case of a gift of stock in a closely-held corporation or appraisals for real estate.
If you sell property or family heirlooms to your child for full fair market value, you don’t have to file a gift tax return. But you may want to file one anyway to cover yourself in case the IRS later claims that the property was undervalued, and that the transaction was really a partial gift. Filing Form 709 begins the three-year statute of limitations for examination of the return. If you do not file a gift tax return, the IRS could question the valuation of the property at any time in the future.
Call Connie Dello Buono, CA Life Lic 0G60621 at 408-854-1883 email@example.com to gift your family using a permanent life insurance. Parents and grandparents can give a gift using life insurance for tax purpose. Contact your Estate planner and CPA to help you navigate with gifting. You may gift a gift to your favorite non-profit such as Motherhealth Inc for affordable senior care , 1708 Hallmark Lane San Jose CA 95124
The Office of Investor Education and Advocacy is issuing this Investor Bulletin to highlight information about life settlements and some of the risks these types of transactions may pose for investors. Individual investors considering a life settlement transaction may wish to keep the following points in mind and seek guidance from an unbiased financial professional who will not receive a commission or any other financial benefit from the transaction.
What is a life settlement?
In a “life settlement” transaction, a life insurance policy owner sells his or her policy to an investor in exchange for a lump sum payment. The amount of the payment from the investor to the policy owner is generally less than the death benefit on the policy, but more than its cash surrender value. The dollar amount offered by the investor usually takes into account the insured’s life expectancy (age and health) and the terms and conditions of the insurance policy.
Why would a policy owner wish to sell a life insurance policy?
Due to changed family or other circumstances, a life insurance policy owner may no longer need the insurance provided by the policy. A spouse may have died, children may have grown up, or a company with life insurance on a key officer may have been sold or gone out of business. Other policy owners may have difficulty making premium payments or simply need cash. In such circumstances, many policy owners surrender their policies or let their policies lapse by ceasing to make premium payments. Selling a policy to an investor may be another alternative. Such sales may be made through life settlement brokers who charge commissions.
How does a life settlement take place and who are the parties involved?
A policy owner may discuss a possible settlement with his or her insurance agent or financial adviser, who then contacts a life settlement broker. In some cases, the policy owner may be solicited directly by a life settlement broker. Life settlement brokers may also be life insurance agents or securities brokers. Depending on the requirements of the states in which they do business, life settlement brokers may be licensed.
The life settlement broker obtains the insured’s authorization to release medical records and forwards the policy owner’s application and medical information to one or more companies known as life settlement providers. Many, but not all, states regulate life settlement providers, who also charge a commission.
The life settlement provider obtains life expectancy estimates on the insured and bids on the application. Life expectancy underwriters (who are not the insured’s personal physician) evaluate the risk of mortality of the insured based on his or her personal characteristics. If the life settlement provider’s bid is accepted, the provider may add that policy to a large group of policies, interests in which may be offered to investors. Institutional investors analyze the information provided by the life settlement provider, often obtaining their own life expectancy estimates. Retail investors, on the other hand, may have to rely on life settlement personnel or other investment professionals to assess the advantages and disadvantages of the transaction. In either case, the investor makes a cash payment to the policy owner or policy owners and continues to pay premiums necessary to keep the policy or policies in effect. Upon the insured’s death, the investor receives the death benefit.
Considerations for investors in life settlements
Before investing in a life settlement, investors may wish to keep the following points in mind.
The return on a life settlement depends on the insured’s life expectancy and the date of the insured’s death. As a result, the accuracy of a life expectancy estimate is essential. If the insured dies before his or her estimated life expectancy, the investor may receive a higher return. If the insured lives longer than expected, the investor’s return will be lower. If the insured lives long enough or if life expectancy is miscalculated, additional premiums may need to be paid and the cost of the investment could be greater than anticipated.
In response to investors’ concerns about the uncertainty of life expectancy estimates, some companies have incorporated purported life expectancy guarantee bonds into their offerings. These companies claim that if the insured does not die by the life expectancy date, they will pay investors the amount they would have received had the insured died by that date. Investors should be aware that the Commission has recently brought enforcement action against a company alleging that it made fraudulent claims about these bonds.
Under certain circumstances, the investor may not receive the death benefit. For example, the life insurance company that issued the policy may refuse to pay out the death benefit if it believes the policy was sold under fraudulent circumstances. In addition, the heirs of the insured may challenge the life settlement or the insurance company may go out of business.
The competence of a life expectancy underwriter and the accuracy of the life expectancy estimate are critical to the return on a life settlement. For the most part, life expectancy underwriters are not licensed or registered by state insurance regulators, and information about the methodologies and review procedures that life expectancy underwriters use is not generally disclosed.
Life settlements can give rise to privacy issues. Insured individuals generally wish to keep their medical records and personal information confidential. Investors, on the other hand, want access to the insured’s medical and other personal information to assess the advisability of their investment and to
monitor it on a continuing basis.
Get more information from the regulators
Investors may want to determine whether professionals involved in a life settlement transaction are registered or licensed. To check on the licensing or registration status of a life settlement broker or provider, contact your state insurance regulator. Contact information is available on the website of the National Association of Insurance Commissioners (www.naic.org). To check on the registration status of a securities broker, use the Financial Industry Regulatory Authority’s on-line BrokerCheck (www.finra.org).