In the early fall, taxes are probably the last thing you want to think about. But this is one year in which it may pay for you to get both your income tax planning and estate planning done early.

There are a couple of provisions in the tax code that resulted in higher rates on income and investments for wealthier taxpayers and capital gains tax increases this year. For example:

• The American Taxpayer Relief Act of 2012 (ATRA) increased the maximum federal capital gain rate beginning in 2013 from 15% to 20% for higher bracket taxpayers (taxable income above $400.000 for single filers and $450.000 for joint filers);
• The Affordable Care Act (ACA) had previously added a 3.8% surtax beginning in 2013 on net investment income for higher income taxpayers (modified adjusted gross income above $200.000 for single filers and $250.000 for joint filers).
• Both ATRA and ACA result in a combined federal capital gain rate of 23.8% for higher bracket taxpayers, an increase of 8.8% over the maximum rate that applied prior to 1/1/13.

To avoid a surprise capital gains tax bill when you file your tax return next April, below are some strategies to bypass capital gains or at least lessen the bite. Learn more about charitable giving on “The Perils of Gifting” FAQ and Charitable Planning pages on Farr Law Firm, P.C. website.  Be sure to make an appointment and consult with a Certified Elder Law Attorney, such as Evan Farr to discuss any issues regarding gifting when it comes to your individual circumstances.

1. Annual Tax Free Gifts: If you’re in a high bracket but your adult children or parents aren’t, consider giving them appreciated stock. You can make annual exclusion gifts of up to $14,000 a year in cash or property each to as many individuals as you’d like without eating into your lifetime gift/estate tax exemption. If you give highly appreciated stock to your child or parent, he takes your low basis but when he sells it – if he’s in a lower bracket – his capital gains rate is 0%. (Special rules apply to kids under 25.) Keep in mind that if you give more than $14,000 to an individual, you’ll need to fill out Form 709- Informational Gift Tax Return.
2. Education:  You can give to your children or grandchildren the gift of education in the form of a 529 college savings plan. You can give an unlimited amount for tuition if you make the gifts directly to the college or educational organization. The money you invest in a 529 college savings plan grows tax-free and withdrawals for education expenses are tax-free, incurring no capital gains.
3. Charity: Instead of selling appreciated stock and giving cash to your favorite charity, give appreciated stock. This way, you get a deduction for the fair market value of the stock (up to 30% of your adjusted gross income), and capital gains taxes do not apply.
4. Donor-advised funds: By giving to a donor-advised fund, you can give today, take the charitable deduction in this year’s taxes, but decide which charities to benefit next year or beyond.
5. Charitable gift annuity: If you want to receive a guaranteed lifetime monthly income as an assurance in old age and to benefit a charity in the process, then consider opting for a charitable gift annuity.

With the increases in capital gains taxes and higher tax rates on income and investments, basis has become an even greater consideration in estate planning. Most people have worked their entire life to accumulate their assets.  Everyone needs the peace of mind that comes with making sure their finances are taken care of if they become incapacitated, that decisions about their health care are carried out the way they would like, and that their children and other heirs are taken care of when that time eventually comes (whether or not they have to worry about capital gains taxes). If you haven’t started your estate planning or to update your documents, don’t delay. Please call 703-691-1888 to make an appointment for a consultation at The Fairfax and Fredericksburg Estate Planning Firm of Evan H. Farr, P.C.

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