The long-term capital gains rate is currently 0% for gain that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate. But the 0% rate is scheduled to expire after 2012. To lock it in, you may want to transfer appreciated assets to adult children or grandchildren in one of these tax brackets in time for them to sell the assets by year end.
Before acting, make sure the recipients you’re considering won’t be subject to the “kiddie tax.” This tax applies to children under age 19 as well as to full-time students under age 24 (unless the students provide more than half of their own support from earned income). For children subject to the kiddie tax, any unearned income beyond $1,900 (for 2012) is taxed at their parents’ marginal rate rather than their own, likely lower, rate. So transferring appreciated assets to them will provide only minimal tax benefits.
It’s also important to consider any gift and generation-skipping transfer (GST) tax consequences. You can exclude certain gifts of up to $13,000 per recipient in 2012 ($26,000 per recipient if your spouse elects to split the gift with you or you’re giving community property) without using up any of your lifetime gift tax exemption.
The GST tax generally applies to gifts made to people more than one generation below you, such as your grandchildren. This is in addition to any gift tax due. But annual exclusion gifts are generally exempt from the GST tax, so they also help you preserve your GST tax exemption for other transfers.
Finally, keep an eye on the Nov. 6 elections and Congress — it’s possible the 0% rate could be extended beyond 2012 or even expanded to include more taxpayers.
Please contact your Meaden & Moore representative or Karen McCarthy at 216.928.5414 or firstname.lastname@example.org if you have any questions.