Three tax breaks that can benefit you in the long run | Jacobson Lawrence & Company, formerly Rue & Associates

Three tax breaks that can benefit you in the long run

The tax overhaul that was rushed through Congress and enacted last year gave taxpayers little time to comprehend its changes. According to Mitchell Drossman, national director of wealth planning strategies at U.S. Trust “You have to be careful making permanent decisions based on a temporary law.”

Estate Tax

The main question is whether to make substantial gifts to heirs now or to leave it to them later. The advantage of giving it away now is that the gift can grow in an heir’s estate, with only capital gains tax. The downside is when the giver is alive, gifts are transferred with what is called the original basis; when sold, the recipient will have to pay tax on the capital gains tax extending back to whenever the investment was originally made.

One way is to structure a transfer that allows parents to retain control of the asset during their life but still secure the deduction is called a qualified residence trust. This allows the parents to continue living in the home with provisions that the gift would be made to their heirs on their death.

Capital Gains Tax

The Trump administration has floated the idea of indexing the basis of an investment to inflation, which could greatly lower the taxable capital gains on an investment when it is sold.

In the long term, indexing an investment’s purchase price to inflation could also reduce the amount of a loss a taxpayer could claim as a deduction. Not all investments rise. And the ones that lose money can be carried forward on tax returns until future gains come them up.

Charitable Giving

Alexander L. Reid, partner at the law firm Morgan Lewis, said one strategy for the person who regularly gives $5,000 a year would be to front-load five years of donations into a donor-advised fund. The $25,000 total donation would get the taxpayer over the $12,000 hurdle, allowing the person to claim a deduction. Additionally, if the person made the gift by transferring $25,000 of highly appreciated stock, there would be no tax on the capital gains.

Comments are closed.