How to Save on Taxes by Sharing the Wealth with the Family

The individual filers and joint return filers (in the bottom 2 brackets), who have their taxable income of less than $36,900 and $73,800 respectively, bear a tax rate of zero-percent (0%) on dividends and long term capital gains. The zero tax-rate creates opportunities for the upper bracket grandparents and parents to transfer their investment income to their lower bracket (10% to 15%) family members, e.g. adult grandchildren and children. The people usually give gifts and transfer the title of property i.e., stocks, real estate, shares, money and other kinds of income-generating assets that have enriched in value over the passage of time.

Normally, no one should make gifts of assets which have declined in value. The reason is that their loss reliefs would be wasted by doing so. Rather they should dispose of their property and utilize the tax losses against their income which had been charged at the higher tax rates. After that, the sales proceeds can then be gifted.

An additional advantage is that the transfer decreases the value of assets upon which possible estate tax can be imposed upon death. At the same times donors need to consider the impact gift tax on substantial lifetime transfers. Alternatively assets may be inherited by the heirs who may be able to get special break.

Investor Behavior

The taxation rules about dividends and capital gains lead to changes in the manner the investors construct the investment portfolios. Special rates for the long term capital gains are attractive incentive for investors to sell the winners and then use these proceeds to reconstruct their portfolios.

It is possible that some tax savvy senior people reconsider their decision to retain the appreciated assets and pass them to their successors at their death. As a result of this heirs will have to pay tax only on increase in value of asset after death if they decide to sell it. On the other hand, the most long-standing capital gains are taxed at the highest rate of 15%, this indicates that the retirees should sell their assets before they die.