4 tax moves NOT to make in 2007 |
|
|
|
Calculate 'kiddie tax' costs
The so-called "kiddie tax" was created to ensure that
parents don't shift investments to their children simply to avoid
paying higher parental tax rates. Recently, the kiddie tax has been
strengthened so that even more families will fall under its rules.
It kicks in when a young investor earns more than
$1,700 from his or her holdings. That money is then taxed at the
parents' higher rate. In 2007, the kiddie tax applies to children younger than 18; in 2008, children under 19
and full-time students under 24 also will also be subject to the
kiddie tax.
That age increase means many young investors should
sell their appreciated assets before the end of 2007 so that they
won't be subject to the kiddie tax next year. But not all young
investors should sell -- if they own assets that are showing a loss
and expect to face the kiddie tax next year, it might be wise to
wait.
In this situation, says Bob D. Scharin, RIA senior tax analyst from Thomson Tax & Accounting, waiting to sell those assets that have lost value can offset any gains in 2008. And that could and reduce the amount of money that's subject to the higher kiddie tax rate.
As with all investments, there is a risk. By waiting, the stock value could change before the asset is disposed of, so don't make investment decisions based solely on tax considerations.
Wait for 2008's lower capital gains rates
Investment strategies also need to be evaluated for all lower-income investors, regardless of age. In some cases, these individuals will want to wait until Jan. 1, 2008, to sell their appreciated assets.
"Next year, the long-term capital gains for people in the 10 (percent) and 15 percent bracket will go to zero," says Weltman. "So hold off selling until 2008 when you're not going to pay any tax."
Taxpayers in the two lowest tax brackets currently pay 5 percent on long-term capital gains. To qualify for the zero rate in 2008, a married couple must make less than $65,100 in taxable income; single filers earning less than $32,550 will pay no tax on their sales of assets they've owned for more than a year.
In past tax years, parents might have given assets
to their children to sell at lower capital gains rates. The kiddie
tax changes, however, have ended that stock strategy for many. But
you might have other family members who could benefit: your parents.
Many seniors, especially retirees who have little
or no taxable income, could take advantage of the zero capital gains
rate. Scharin suggest investors with appreciated long-term assets
consider giving them to mom and dad to sell. And don't worry about
the holding period of the gift; it's the same as the original owner's.
"If I held a stock for two years and gave it to my mother, she could turn around and sell it the next day and get the long-term capital gains rate," says Scharin. And in 2008, that would be zero.
However, even if you (or a family member) do fall
within the income limits next year, not all of the gains might qualify
for the zero rate. Capital gains from the sale of stocks and mutual
funds are added to your income, and that additional income might
lift you into a higher tax bracket. If that happens, a portion of
your gains would be taxed at that higher rate, says Scharin.
And Scharin and Weltman are each quick to note that tax considerations should never be an investor's primary motivation for making market moves.
"You have to let the market dictate your selling plans," says Weltman.
|
