Thursday, February 28, 2008

Too Good To Be True

Introduction. This newsletter is slightly off topic. I give credit to one of the authors of my email estate planning newsletter for bringing the subject to my attention.

Zero Tax. It is hard to believe, but there were provisions in the 2003 and 2005 tax laws to provide for zero tax on net capital gains and qualified dividend income in the years 2008, 2009 and 2010. Who gets this tax plum?

Taxpayers who fall into either the 10% or 15% federal income tax bracket (without the addition of capital gains or qualified dividends) are likely candidates for zero federal tax gains.

Keep on Reading. At first blush you may not think you would fit into this category, but read on. There may be ways to take advantage of zero tax.

1) The first thought of transferring appreciated securities to kids who would be in a low tax bracket has been blocked by broadening the "kiddie tax" extending the age of a child/recipient to age 19 or age 24, for a student still dependent on parents.

2) However, you may have an adult child (out of college) who falls into the 10 or 15% bracket. You can gift appreciated securities to that child, who can then sell them with zero tax.

3) If you help support a parent or other family member, using appreciated securities, you may be able to take advantage of the zero tax rules for 2008.

4) US service members deployed to combat zones would be good candidates either to sell securities or receive gifts of appreciated securities which can be sold.

5) Explore other ways to reduce your taxable income, if you want to take advantage of this benefit.

Techniques to Reduce Taxable Income. If you are interested in exploring the possibilities of reducing your tax bracket to take advantage of the zero tax, you should go over the various alternatives with your income tax advisor or financial planner to see if there is a way to qualify for this zero tax benefit. Some methods used by clients to reduce taxable income (and especially to reduce income taxes on social security) could include some of the following techniques:

1) Use investment vehicles such as variable annuities by which income tax can be deferred.

2) Use segregated principal for living expenses.

3) Reduce withdrawals from retirement plans.

4) Maximize tax deductible contributions to retirement plans (not an itemized deduction, but a subtraction from gross income), utilize tax loss carry backs or carry forwards to reduce your tax bracket.

Negatives. There are down sides to be considered in income tax planning, of course. These include:

1) Capital gains income might trigger taxation of a non-taxed social security benefit.

2) A parent might be faced with disposing of the gifted funds in qualifying for Medicaid.

3) A student might find extra money jeopardizing eligibility for financial aid.

Conclusion. The subject of this month’s newsletter does not pertain directly to estate planning and thus is a little bit out of my area. However, I thought you might find this to be an interesting subject and possible cause to sit down with your financial planner or income tax advisor to see if any of the possible applications of zero tax can benefit you or members of your family. One bright spot in this whole process is that transaction costs for stock sales can be very cheap. Moreover, the wash sale rule does not apply so that the same security that is sold to recognize gain can be immediately repurchased at a higher cost basis.

Maybe this newsletter will trigger a flash of inspiration, with some ideas that might be applicable to the situation of you, a member of your family, or a friend.

In the meantime, if you have estate planning needs or have friends or family members who require consultation for estate planning or Medicaid eligibility, please don’t hesitate to contact Jim Modrall or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660

©BRANDT, FISHER, ALWARD & ROY, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional
advice.