Breaking up taxable income to your children or even grandchildren and other family members is a proven technique in tax planning. It may allow you to lessen your family’s total taxes. Yet, this technique could be more valuable these days. With the new ATRA (American Taxpayer Relief Act), new sets of tax rates are applicable to regular income while tax breaks for dividends and capital gains favors investors with upper-income.
If you own real estate or securities and other income-producing assets, your tax will be based on the income from those properties computed on the upper tax bracket. But when you shift the liability for that asset to your family members who are less likely to get charged for high taxes, you will surely pay less in taxes.
Normally, you may give the asset to a family member as a gift. Making use of a trust is involved in more sophisticated settings. In any way, the income from the asset is taxed to your family member according to the lower tax bracket rather than the upper end.
What makes this tactic more feasible these days for higher income individuals and families are the tax amendments mentioned under ATRA. In the advent of 2013, 39.6% as the highest tax rate is added for single filers gaining an income higher than $400,000 as well as joint filers having income over $450,000.
Moreover, the optimal rate for 15% dividends and long term capital gains have increased to about 20% for those investors under the income threshold bracket.
If you own an asset that earns $20,000 and you are under the high bracket in 2013, you will pay about $7920 in income taxes. Yet, a child under the tax bracket of 15% will only pay about $3,000 in income taxes given the same income.
However, there are other factors to consider like gift tax in case of transferring your property. However, you may also qualify for exclusion in this tax form. There is also such thing as “kiddie tax” that is applicable to investments over the yearly limit for children below 19 and students below 24. In such cases, the tax will be based on the higher rate of the parent.
Overall, the best method to transfer ownership is to come up with an efficient income-splitting plan.
Pacific Tax & Financial Group