Here it comes – that dreaded word: taxes. Coupled with “capital gains” and most people cringe when they hear it. Those who haven’t had to wrestle claim capital gains taxes yet eventually realize why just the thought of it is so overwhelming. In short, it boils down to the IRS and its cut on monies we’ve earned when we sell those big ticket items like stocks and real estate.
She Said Yes…Then No
Taking a step further, a capital gain is what happens when you sell an asset for more than what you paid for it. Could be that stock in the drug company or your fiancé’s diamond engagement ring. If you pay $8,000 for the ring and then a year later she gives you back the ring and you sell it to a buddy for $9,000, then your capital gain is $1,000 and you can expect to be taxed on that $1,000.
Remember – you already paid taxes on the ring when you bought it, but you only paid taxes for $8,000. You have a realized capital gain, meaning you sold it (versus an unrealized capital gain when you hold on to the ring, sure that it’s increased in value but also sure your fiancé will come to her senses and return to you. No worries about paying capital gains taxes on a fantasy that she’s going to suddenly accept your garage full of go carts – those fantasies are free).
Shifting Capital Gains Taxes in Essex Junction Vermont
You might have heard a lot about the super low tax rate for capital gains in recent months. The low 15 percent was impressive – though short lived. This year, you’re looking at 20 percent. That thousand dollars you made by selling the engagement ring means you’re going to send the IRS $200 of it. And if you earn an especially impressive salary, you may be looking at a net investment income surtax of 3.8 percent. That said, those numbers change every year.
So what does this mean for your estate plan? A number of things. First, if you have millions in stock, the last thing you want to do is give those assets away to family members now or sell them for the cash – you’re looking at nearly 24 percent capital gains tax. If you keep it in your estate and leave it to your heirs after you’ve passed away, it eliminates that capital gains tax in its entirety. Remember, too, you might believe you have $7 million in assets, but if could equate to even more were you to sell it.
Safety Mechanisms in Your Estate Planning
There are safety mechanisms in place that can help protect your assets and estate planning efforts. You’ll want to speak with your estate planning attorney to ensure you’re getting not only the best advice, but the most current information available. There are personal exemptions, adjusted incomes, trusts you might have in place that would be affected and a host of other realities.
Further, your attorney can help ensure your retirement savings aren’t in jeopardy of being hit by the surtax.
From how you contribute to your retirement plan to better understanding the “tax free” aspects of a Roth, very few of these laws are straightforward. It’s important to approach it with first, an open mind, but just as importantly, a realistic understanding that things aren’t always “black and white”.
- Words to the Wise: Five Estate Planning Suggestions - March 1, 2021
- Updating Your Plan: Beneficiary Designations - February 26, 2021
- Four Inheritance Planning Tips for Blended Families - February 17, 2021