- The Shifting Sands of Taxes
- April 27, 2015 | Author: Nicholas A. Reister
- Law Firm: Smith Haughey Rice & Roegge, P.C. - Grand Rapids Office
- Thinking about selling or transferring property? You may want to give it a little more thought. Recent trends in tax rates have changed how you should be thinking about selling or gifting property. If you’re married, unless your estate is worth more than about $11 million this year, giving away property will not provide any estate (death) tax savings. Although a smaller population is subject to estate taxes, more of the population must now pay attention to income taxes.
Nearly all taxpayers are subject to long-term (assets owned for more than one year) capital gains tax rates between 15% and 28% on assets sold in 2015. In the simplest terms, capital gains taxes apply to the difference between the value of the asset when it was acquired (known as the basis) and the value of the asset when it is sold. The applicable rate depends on the nature of the asset. For example, if you sell property that you have depreciated on previous years’ tax returns, you will pay 25% on the recapture of that depreciation. If you sell qualified small business stock or collectibles such as art, coins, precious metals, antiques, etc., gains on those sales are taxed at 28%. The applicable rate is also impacted by your taxable income bracket, the highest bracket being taxed at 20% while long-term capital gains in the lower brackets are taxed at 15%.
It’s also important to understand that basis is “stepped-up” at the owner’s death. For example, consider a person who owns a farm worth $1 million that was purchased many years ago for $75,000. If the farm is sold during the property owner’s lifetime, the tax due on the gains of the sale would be between $138,750 and $185,000. However, if the property owner leaves the property valued at $1 million to her heirs and the heirs sell it at its current value following her death, the taxes due on the sale are $0.
In this tax climate, it may make sense to hold assets that have appreciated in value for your heirs. At the same time, if you are in the top tax bracket and the property is going to be sold or it produces income, you may consider passing the property to loved ones in a lower tax bracket. Considering that federal tax brackets range between 10% for the lowest earners and 43.4% for the top earners, it is easy to see that there may be a significant advantage to passing income-producing assets to loved ones in lower tax brackets. If you factor in state income taxes, the potential advantage could be even greater.
Given the complexity and ever-changing landscape, no gifting, estate or income tax planning should be undertaken without professional advice. It is important that we all pay our fair share, but appropriate planning can make your money more effective for you, your loved ones and your community. If you would like to discuss this topic more, please contact the attorneys at Smith Haughey.