Taking Advantage of Capital Gains Rates

Reginald A.T. Armstrong • Investment Planning


Usually, most investors try to avoid taking capital gains. However, there are strategies that you might want to consider using to your advantage.

The Zero Percent Bracket Strategy

If your taxable income falls below $38,600 filing single or $77,200 married filing jointly, your tax rate for long-term capital gains and qualified dividends is zero. This is a tremendous opportunity to sell low cost basis stock without incurring capital gains.

The Shift Down A Generation Strategy

If you find yourself in the 15% or 20% capital gains tax bracket but have an adult child (kiddie tax rules are tougher under the new law) who is in the 0% bracket, you could gift the child the low-cost basis assets, and they could sell for zero capital gains. Whether they keep the assets or gift back to you is another issue altogether.

The Step-Up Cost Basis Strategy

If you are in the last innings of life expectancy, or perhaps have an unfavorable medical diagnosis, you may want to do nothing—perhaps even make sure low-cost basis stock is in your name only. When you pass away, your stock will receive a step-up of basis for the closing price of the day you passed away. Your heirs will only have capital gains exposure from that price/date going forward.

The Shift Up A Generation Step-Up Strategy

If your parents are the ones in the last innings, another option is to gift them your low-cost basis stock. Then when they pass away, they leave you the stock as a beneficiary—but now it has new, higher basis. One caveat, however. The parent must live one year after receiving the stock for the donor to receive it back at the new basis. Of course, your mother could just make one of your children (her grandchild) the beneficiary, and this would avoid the issue if she should pass away sooner than a year.

This is not meant to be a comprehensive list of strategies but is meant to highlight the importance of having a wealth management team that includes your tax advisor and a true wealth manager—not just an investment person. Let your wealth manager know if you would like to discuss these or other strategies.

The above should not be construed as individual advice; please consult your tax advisor.

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