The majority of young people don’t collect much in the way of dividends and capital gains. These are usually types of earnings enjoyed by the rich as well as the retiree set. Because retired persons do not have income from employment, a larger part of their income accrues from investments producing dividends and capital gains. For that reason, any kind of decline in the income tax rates on these types of income are in essence, a retiree levy break.
The tax act approved in 2003 lowered the long-term capital gains rate to 15% for everyone in the 25% or higher bracket and down to five percent for taxpayers in the 10%-15% brackets. So for the last 9 years, retired persons savoring dividend and capital gain income have experienced a great tax savings. In ’08, the tax rates got even better when the capital gains tax rate dropped to 0% for individuals in the ten percent to fifteen percent brackets, (the tax brackets experienced by most retirees). Taxpayers thought these generous rates could not prevail since they were set to expire in 2010. But Congress extended them through 2012. And once again, Congress has extended this specific gift into 2013 with the American Taxpayer Relief Act of 2012. This offers some money saving options for you if you are gifting investment assets to any individual in a reduced income tax bracket, such as young children as well as grandchildren or benefit from the lower tax brackets yourself.
As an example, imagine you possess mutual fund accounts that you desire to use to help your grandson when he begins college in 2014. In case you are in a substantial income tax bracket, you will have to pay 15% to Twenty three point eight percent (according to your actual earnings) on any capital gains that you recognize on the mutual fund sale. The government specifies any time you give an appreciated asset, the donee gets the gift at your cost basis. For that reason, any untaxed profit can be passed on with the asset and subject to taxes based on the donee’s tax bracket when sold. If your grandson liquidates any of the gifted shares, he’ll pay 0% on the capital gain and on the mutual fund dividends attributable to qualified dividends.
The same applies to giving those mutual fund shares to your retired mother or father in reduced tax brackets.
Note that these low rates apply to long-term capital gains meaning on the sale of an investment you have kept for more than a year. In the case involving mutual fund shares, every year you get and also pay tax on the capital gains made within the fund and for most funds, these are short term capital gains that do not get these reduced tax 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 sure you benefit from the lower rates is to own the actual property like shares of stock in a company, property or any other asset held for investment. Once you possess the asset for twelve months, your profit on sale will enjoy preferential rates. You can view detailed information in this Blog.
Bob Richards is a well known financial writer. If you are planning for retirement or already retired, stay educated and visit his collection of articles
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