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Capital Gains Tax

There are so many things to keep track of when it comes to personal finances. Through the years I have done our personal taxes because we have a rather simple income base, but it is difficult to keep up with all of the different tax laws. Having the tax programs on the computer is extremely helpful. If it had not been for the computer program that I installed this year we most likely would have had a penalty. My brother and sister in law had a penalty and they went through a tax preparation service.

My husband’s father retired several years ago and made some great investments. He did so well that he transferred some of his holdings into each of his children’s name. This was paid out into a check for each of them. Because this payment was paid directly from the company the income was subject to capital gains tax. We each received a statement for tax purposes. My brother and sister-in-law misplaced their statement and told their tax preparer that they were gifted money by his father. The tax preparer told them that this did not have to be claimed because the amount was not large enough. A few months later they were sent a letter from the internal revenue service because they did not report the capitol gains tax. They contacted the person that had prepared their taxes. He told them that he did not realize that the money was from an investment and that they definitely had to pay capital gains tax on the amount. Because they did not produce the form that was sent by the investment company his firm would not cover the penalty. My brother in law was very upset by this. He felt that he had told him about the money and was told he did not have to claim it, so it was the accountant’s fault that they had a penalty.

This was a good lesson for all of us to learn as we prepare our taxes. We are getting to the age where gifts from parents and estates are becoming part of our income. It is important to know the difference between a monetary gift, which is not taxable as long as it is under a certain amount, and money that comes from the sale of an investment. All capital gains tax needs to be paid. Capital gain is money that is made off of an investment. If my husband’s father would have had all the money from the investment paid to him, and then cashed the check and given it to us it would have been a cash gift and would not been taxable. He would have had to pay capital gains tax on the entire amount. By splitting the funds in everyone’s name he also spread the tax responsibility.

 

Captial Gains Tax Explained

Capital Gains tax is a federal tax penalty that is imposed on capital accumulation, investment and productivity. Some of the income that is subject to capital gains tax includes the sale of an investment, a home, a family business, a farm or ranch or even a work of art.

tax, taxes, finance, financial, money, income, business, revenue,

Capital Gains tax is a federal tax penalty that is imposed on capital accumulation, investment and productivity. Some of the income that is subject to capital gains tax includes the sale of an investment, a home, a family business, a farm or ranch or even a work of art. The capital gains tax is applied on the difference between the price paid for an item and the money received from selling it, or the capital gain. The most common form of capital gain for people is the sale of their corporate stock. The capital gains tax rate for individuals is currently at one of its highest rates ever and is at 28% while the corporate rate is at its greatest level in history, namely 35%. There is an inequality with capital gains tax in the fact that people must pay taxes on all of their gains but are only able to deduct a portion of their losses. This particularly applies to investments that fluctuate between gains and losses over time.In many states taxpayers are liable, not only for the federal capital gains tax but also the state’s own form of capital gains tax. This can actually take the combined rate to almost 40%. California, Montana and Rhode Island are amongst the highest in the country.

For the government, the capital gains tax payment represent 6% of personal and corporate income tax receipts and 3% of total federal revenues. There is a lot of controversy surrounding the capital gains tax that individuals and corporations have to pay but it actually brings in much less revenue for the federal government than most people would think. In fact, the total collections during the 1990s were between $25 billion and $30 billion a year. In the USA, capital gains are not indexed for inflation which means that the seller pays capital gains tax on the real gain and also on the gain attributable to inflation. This is one reason that the capital gains tax is lower than regular income tax rates. In other countries, such as the United Kingdom, the capital gains tax rate is much higher (over 40%) but there it is actually indexed to inflation. The difference between capital gains tax and all other forms of federal tax is that it is basically a voluntary tax. People can avoid paying any of the tax by simply not selling their assets. This is becoming increasingly common, especially with the uncertainty of the stock market, and the government estimates that there is $7.5 trillion of unrealized capital gains which would all be subject to capital gains tax if it was sold.

 

How To Eliminate Capital Gains Tax

First off I will give a short summary of the Capital Gains Elimination Trust (CGET). Then, I will provide some details about how it works and conclude with a case study as an example of how someone might use this.

Summary:
The Capital Gains Elimination Trust is better known as a Charitable Remainder Trust. How this works is one would deposit highly appreciated assets into the CGET. The trust sells the assets and pays no capital gains tax. You then get to withdraw an...

Retirement, Retirement Planning, Financial Advisors, Life Insurance

First off I will give a short summary of the Capital Gains Elimination Trust (CGET). Then, I will provide some details about how it works and conclude with a case study as an example of how someone might use this.

The Capital Gains Elimination Trust is better known as a Charitable Remainder Trust. How this works is one would deposit highly appreciated assets into the CGET. The trust sells the assets and pays no capital gains tax. You then get to withdraw an income each year from the trust. The withdrawal can be earnings and principal.

Donors can be the trustees of the trust and decide how to invest the trust’s assets. In addition, they get an income tax deduction for their contribution to the trust that is based on the term of the trust, the size of the contribution, the distribution rate, and the assumed earnings on the trust.

At this point, the assets are now removed from their estate, they have paid no tax on the capital gains, and they have a stream of income. The IRS requires at least 10% of the present value to be projected to go to a charity of your choice.

If someone wanted the money to be left to family, they could use part of the money they would have paid taxes on and buy a life insurance policy outside of their estate. Then, their children will still receive as much or more inheritance money, free of income and estate taxes.

A CGET can be used with real estate, stocks, or any other asset with capital gains, and must be unencumbered with debt.

Details:
CGETs are subject to a maze of law and regulation. The failure of a CGET to meet all requirements can result in a trust being disqualified as a Charitable Remainder Trust, with negative income, gift, and federal estate tax consequences. The loss of charitable status would also defeat a donor’s charitable intent.

Some of these requirements involve numerical tests, several of which have long been a part of the qualifying conditions for CRTs. The Taxpayer Relief Act of 1997 (TRA 97).

Pre-TRA 97
 5% probability test (this applies only to charitable remainder annuity trusts)
 5% minimum payment test
TRA act of 1997
 50% payout limitation test
 10% minimum charitable benefit
Relief Provisions
TRA 97 provided several relief provisions for trusts which would meet all CRT requirements, except the 10% minimum charitable benefit requirement. The law provides that a trust may be declared void ab initio (from the beginning). Under this option, no charitable tax deduction is permitted to the donor for the transfer and any income or capital gains created by property transferred to the CRT becomes income and capital gain to the donor.

The new law also allows a donor to reform a trust, by modifying either the annual payout or the term of a CRT (or both), to allow the trust to meet the 10% minimum charitable benefit. Strict time limits have been imposed for this reformation.

Seek Professional Guidance
The laws and regulations surrounding Charitable Remainder Trusts can be complex and confusing. Individuals facing decisions concerning the tax and estate planning implications of a CGET are strongly advised to consult with an attorney.

Case Study:
Beth and John own $1 million of stock that cost $100,000. They realize that their portfolio needs better diversification and would like more income, but they do not want to pay the capital gains tax. They could place the stock in a trust set up by their attorney. The trust would be a tax-free entity and could sell the stock without paying the tax.

Now there is $1 million cash that can be invested. This could go into a balanced portfolio, or an annuity. It doesn’t matter. And Beth and John can make a one-time decision on how much lifetime income they’ll receive from the trust.

The IRS will let Beth and John take an income tax deduction of $417,180 when they do this, as long as at least 10% of the money that originally goes into this trust is left to charity. And since they technically no longer own the $1 million, it is out of their estate, thereby saving their heirs $460,000.

Beth and John are thrilled. They’ll end up with more income, less market risk, and a nice tax deduction. But the kids aren’t so happy. They thought that they were going to get the $1 million. However, a wealth replacement trust would take care of that.

Beth and John take part of their new income and buy a $1 million, second-to-die life insurance policy on their lives. The policy is owned by an irrevocable life insurance trust so the proceeds are removed from their estate. When the survivor dies, the children will receive $1 million tax-free, and the charity will get whatever remains in the trust.

If you ever have questions about planning for your immediate or long-term retirement goals, please feel free to call or send in the enclosed coupon.
Respectfully,
Mark K. Lund, CRFA
Wealth Manager
Stonecreek Wealth Advisors, Inc.
10421 So. Jordan Gateway, Suite 600
So. Jordan, UT 84095
801-545-0696
www.stonecreekwealthadvisors.com
Securities offered through Sammons Securities Company, LLC
Member NASD and SIPC

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