Yes,
we know it’s only August; however, now is a good time to review your 2013 tax
status and (if necessary) do some preliminary planning. As you know, we at
Paragon Financial Advisors do not prepare taxes and we advise you to consult
your tax professional to ensure any suggestions made here are applicable to
your particular circumstances. That being said, there are some items that may
be worthy of your consideration. This
list is, of course, not inclusive of all items that might be beneficial to you.
Tax Free Income-SEC football at Texas
A&M is about to start. As you know, hotel/lodging arrangements for football
weekends are at a premium. Did you know you can rent your home for less than 15
days a year and the rental income is tax free? Often known as the “Masters’
Provision” because homeowners used it to rent their homes for the Masters Golf
Tournament in Augusta, Ga., this tax benefit might prove useful to families
willing to rent their home for home game weekends. However, be sure and visit with
your property owner’s association and/or insurance company for possible
conflicts or prohibitions before doing such a rental.
Required Minimum Distributions from and IRA-
Congress has extended the provision allowing a maximum of $100,000 of a
required minimum distribution (for account holders older than 70 ½) to be made
directly from an IRA to the charitable organization with no tax consequences.
The donor does not receive a charitable donation for the amount donated;
however, the amount donated is not counted in taxable income. With the health
care tax increases becoming effective in 2013, reducing taxable income can be
very advantageous. Be sure to make arrangements well enough in advance to allow
the charity to receive payment prior to the end of year; we recommend that you
initiate such transfers no later than mid-November.
Capital Gains/Loss Harvesting- The
stock market is at all time high levels. However, many people have losses
carried forward from 2008. Review your portfolio gain and loss positions
(selling gains to offset losses) so you can realize some of your current market
gains with no tax consequences.
Charitable Donations-As you consider
your end of the year donations, consider gifting appreciated assets (stocks) to
the charity in lieu of cash. You can gift the stock and get credit for
donations at current market value regardless of your cost basis. You do not
have to pay capital gains on the stock as you would if you sold the stock and
gave cash to the charity.
“Step-up”
in Basis at Death- While considering tax harvesting provisions, keep
in mind that appreciated assets receive a “step-up” in basis at the first death
of a spouse in community property states (or at death of the owner in separate
property states). If a couple bought stock at $25 per share originally and the
stock is now valued at $125 per share, sale of the stock would incur taxes on a
gain of $100 per share (at ordinary income or capital gains rates depending on how
long the stock had been owned). Transferring the stock to children would mean
the original cost ($25 per share) would be passed to the children subjecting
any subsequent gain on sale above that basis to income taxes. However, at the
death of the first spouse, the stock value is “stepped up” to the market value
as of the date of death and taxes on gains to that point are not calculated.
Obviously this is not a preferred method of tax planning, but in those cases
where medical/age conditions apply, one should be aware of it.
Estate Tax Exemption Portability- One
provision of the 2013 tax changes was the exemption of $5 million per person
exemption from estate or gift taxes. Therefore, a couple could shelter $10
million from estate taxes. That amount was indexed for inflation; the 2013
exemption amount is $5.25 million per individual. In addition, that exclusion
amount is “portable” i.e. a deceased spouse’s estate can transfer to the
surviving spouse any unused portion of that estate/gift exemption. However, an
estate tax return must be filed to take advantage of this portability benefit.
As
tax rates increase and deductions decrease, tax planning becomes even more
critical. We, at Paragon Financial Advisors, will work with you and your chosen
tax professional to integrate tax benefits into your financial planning. Please
do not hesitate to call us for review of your account.
