A Look at Saving on Taxes
The following information is a free preview of the contents included
in The Financial GourmetTM.
Table of Contents
Tax on Capital Gains
Estate Tax
Social Security
Questions and Answers
Tax on Capital Gains
Since 1997 there have been substantial changes in the tax rate structure regarding capital
gains. One of the areas that is beneficial to the individual regarding capital gains and
passing property, etc. to your legatees or heirs is "stepped-up cost basis". When someone
inherits property, etc., that person can establish a new cost basis for the property, etc. at
the current value. This provides a substantial tax savings when the legatee or heir sells the
property. Here is an example:
You sell the item:
| $120,000 |
$20,000 |
$100,000 |
$15,000 |
| Sale Price |
Your Original Purchase Price |
Capital Gain |
Tax Due |
Your Legatee or Heir sells the item after they inherit it:
| $120,000 |
$120,000 |
$0 |
$0 |
| Sale Price |
Stepped-Up value at death of original owner |
Capital Gain |
Tax Due |
This strategy can save a substantial amount of taxes when you are passing
things to your legatees and heirs.
Estate Tax
Estate taxes will not be a problem for most individuals. The exemptions from this tax
are as follows:
| Year of Death: Filing Requirement |
| 2002 and 2003 |
$1,000,000.00 |
| 2004 and 2005 |
$1,500,000.00 |
| 2006, 2007, and 2008 |
$2,000,000.00 |
| 2009 |
$3,500,000.00 |
If your gross estate (minus allowed deductions) is lower than the above referenced amounts,
you will not have an issue with estate taxes. Don't forget that in 2007 you can gift $12,000
(per donor, per donee, per year) in order to reduce the size of your taxable estate. This
amount is subject to the lifetime exclusion amount as determined by the IRS.
Social Security
How much, if any, of your social security benefits are taxable depends on your total income
and marital status. You can use the worksheet in the Form 1040A or Form 1040 Instruction
booklet to help determine whether any of your benefits will be taxable.
Before you go to the instruction book, do the following quick computation to
determine whether some of your benefits may be taxable:
- First, add one-half of the total social security you received to all your other
income, including any tax exempt interest and other exclusions from income;
- Then, compare this total to the base amount for your filing status.
The 2006 base amounts are:
- $32,000 for married couples filing jointly
- $25,000 for single, head of household, qualifying widow/widower with a dependent child,
or married individuals filing separately who did not live with their spouses at any time
during the year
- $0 for married persons filing separately who lived together during the year
If the amount of your calculations is below the 2006 base amounts, you will not owe tax on
your benefits.
Questions and Answers
| Are estate taxes the same as inheritance taxes? |
Not all states have an inheritance tax. There is no inheritance tax in the
state of Illinois and the estate tax will not affect an estate valued under
$2,000,000 for the year 2007 and 2008. (See the table listed above for other exemption levels) |
| What is the best method to pass assets to your heirs/legatees? |
Allow your heirs/legatees to inherit your assets. By allowing someone
to inherit assets/property, you can save him or her a substantial amount of
tax on capital gains by allowing them to use the “stepped-up” cost
basis formula explained above. |
| In order to reduce the amount of tax paid on your Social Security is it necessary
to reduce your overall income? |
No. It is not necessary to reduce your overall income. The key to reducing the
tax liability is to reduce your reported income. By re-structuring your investment portfolio
to replace taxable interest income with tax-deferred interest growth, you can effectively
reduce your reported income without reducing your earned income. In many instances
this can decrease the amount of tax that is owed on your Social Security benefits. |
| What should I do when creating a tax strategy to maximize your investment return
and reduce your tax liability? |
You should do these following things:
- Set Reasonable Goals and Expectations
- Have a Complete Representation of Your Finances Available for Review
- Understand Current Tax Regulations
- Work with a Professional
Each of these points is critical due to the many different types of investments and the
complicated nature of the tax regulations. It is very important to work with professionals
who can help create the best plan for your situation. |
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