In the United States it often seems as though just about everything is taxed. It seems that way because the truth is that just about everything is potentially taxed! It should come as no surprise then to find that tax avoidance is a common estate planning goal. In order to avoid taxes though you need to understand all the potential ways in which your estate can be taxed and/or all the potential tax implications of your estate planning decisions. For example, are you familiar with the capital gains tax? If not, you need to be as it may impact your investment, retirement, and estate planning decisions.
Capital gains taxes are a federal tax that is levied on the gain realized when you sell a capital asset. A capital asset includes all kinds of property, movable or immovable, tangible or intangible, fixed or circulating. In short, just about anything you own is likely a capital asset. Realized gain refers to the profit you make when you sell an asset. For example, let’s assume that you purchased your primary residence ten years ago for $150,000. You decide to sell the home and are able to do so for the sales price of $225,000. You realized a gain of $75,000 on the sale of the home. That $75,000 is potentially subject to capital gains tax.
The Internal Revenue Service divides capital gains taxes into short-term and long-term gains. Short-term gains apply to assets held for less than a year while long-term gains apply to assets held for a year or more. The tax rate you pay on capital gains depends on whether it is a short or long-term gain as well as your personal tax bracket.
When you gift and asset in your Last Will and Testament or through a trust the beneficiary typically gets the benefit of a “step up in basis”. A step up in basis means that the basis used to determine capital gains taxes when the asset is ultimately sold by the new owner will be the fair market value at the time the asset was gifted instead of your basis in the asset. Using the example of your home, let’s assume that instead of selling it tomorrow it is gifted to your child as a result of your death. Further assume that your child decides to sell the property ten years later. At that time the house is worth $400,000. If your basis of $150,000 was used the gain realized would be $250,000. Instead of using your basis of $150,000 though, the beneficiary will use the fair market value at the time of the gift which was $225,000, resulting in a realized gain of $175,000.
If you have additional questions about capital gains taxes or tax avoidance strategies for your estate plan, contact the experienced South Carolina estate planning attorneys at Kuhn & Kuhn Law Firm by calling 843-577-3700 to schedule your appointment.
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