Most young adults don't acquire much in the way of stock dividends and investing profits. These are generally categories of earnings received by the wealthy as well as the retiree set. Because senior citizens don't have income from employment, a bigger percentage of their earnings accrues from investments generating dividends as well as capital gains. For that reason, any decline in the tax rates on these types of income are in effect, a retiree tax break.
The tax law approved in 2003 reduced the long-term capital gains rate to fifteen percent for anyone in the 25% or higher bracket and down to 5% for people in the 10%-15% tax brackets. So for the last nine years, retired persons savoring dividend and capital gain earnings have experienced a nice tax break. In 2008, the tax rates got even better when the capital gains tax rate fell to 0% for people in the 10% to 15% brackets, (the brackets experienced by many retired persons). People believed these low rates could not last because they were set to run out in 2010. But The nation's lawmakers prolonged them through 2012. And once again, The nation's lawmakers has prolonged this specific gift into 2013 with the American Taxpayer Relief Act of 2012. This offers some money saving opportunities for you if you're planning on giving assets to any individual in a reduced income tax bracket, such as kids as well as grand kids or take advantage of the reduced tax brackets yourself.
As an example, imagine you own financial assets that you want to use to help your grand son when he goes to college in 2014. In case you are in a substantial income tax bracket, you'll need to pay 15% to 23.8% (according to your true earnings) on any gains which you recognize on the mutual fund sale. The Internal Revenue Service specifies any time you give an appreciated investment, the donee receives the present at your cost basis. Therefore, any untaxed income is transferred with the property and subject to taxes based on the donee's tax bracket when sold. So if your grandson sells some of the gifted shares, he will pay zero percent on the capital gain and also on the fund dividends accruing from qualified dividends.
The same goes for gifting those mutual fund shares to your retired mother or father in lower tax brackets.
Note that these extremely low rates apply to long-term capital gains which means on the sale of an asset you have held for more than a year. In the case involving mutual fund shares, each year you get and pay income tax on the capital gains made inside the fund and for most funds, these are short-term capital gains that do not get these favorable rates. Mutual funds which generate a higher portion of their profits as long term gains would be index funds (as opposed to actively managed funds).
The only method to be certain to enjoy the reduced rates is to own the actual property for example shares of stock in a business, real property or other property held for investment. Once you hold the asset for twelve months, your profit on sale will enjoy preferential tax rates. You can see the full details in this post.
The tax law approved in 2003 reduced the long-term capital gains rate to fifteen percent for anyone in the 25% or higher bracket and down to 5% for people in the 10%-15% tax brackets. So for the last nine years, retired persons savoring dividend and capital gain earnings have experienced a nice tax break. In 2008, the tax rates got even better when the capital gains tax rate fell to 0% for people in the 10% to 15% brackets, (the brackets experienced by many retired persons). People believed these low rates could not last because they were set to run out in 2010. But The nation's lawmakers prolonged them through 2012. And once again, The nation's lawmakers has prolonged this specific gift into 2013 with the American Taxpayer Relief Act of 2012. This offers some money saving opportunities for you if you're planning on giving assets to any individual in a reduced income tax bracket, such as kids as well as grand kids or take advantage of the reduced tax brackets yourself.
As an example, imagine you own financial assets that you want to use to help your grand son when he goes to college in 2014. In case you are in a substantial income tax bracket, you'll need to pay 15% to 23.8% (according to your true earnings) on any gains which you recognize on the mutual fund sale. The Internal Revenue Service specifies any time you give an appreciated investment, the donee receives the present at your cost basis. Therefore, any untaxed income is transferred with the property and subject to taxes based on the donee's tax bracket when sold. So if your grandson sells some of the gifted shares, he will pay zero percent on the capital gain and also on the fund dividends accruing from qualified dividends.
The same goes for gifting those mutual fund shares to your retired mother or father in lower tax brackets.
Note that these extremely low rates apply to long-term capital gains which means on the sale of an asset you have held for more than a year. In the case involving mutual fund shares, each year you get and pay income tax on the capital gains made inside the fund and for most funds, these are short-term capital gains that do not get these favorable rates. Mutual funds which generate a higher portion of their profits as long term gains would be index funds (as opposed to actively managed funds).
The only method to be certain to enjoy the reduced rates is to own the actual property for example shares of stock in a business, real property or other property held for investment. Once you hold the asset for twelve months, your profit on sale will enjoy preferential tax rates. You can see the full details in this post.
About the Author:
Bob Richards is a well known financial writer. If you are planning for retirement or already retired, stay educated and visit his Posts on retirement
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