Many analysts conclude that income tax rates will rise for higher-income households by 2011. Many experts believe the capital gains rate may rise from 15 to 20 percent and foresee a new 5.4 percent surcharge on income exceeding $1 million. With those possibilities in mind, here are some strategies to consider for 2009 and 2010.
Consider recognizing substantial gains in 2009 and 2010. You could continue to harvest losses this year and next and plan to offset recognized gains with current capital losses as well as capital loss carry-forwards.
Remember the advantages of varied tax-advantaged vehicles, including 401(k) plans for retirement and Section 529 plans for college savings.
In 2009, employees younger than 50 can contribute as much as $16,500 to a 401(k). Those who are 50 or older can contribute an additional $5,500. Earnings on before-tax contributions accumulate tax-free until they are distributed.
Contributions to a Section 529 plan grow tax-free, but are made with after-tax dollars and distributions for qualified higher educational purposes are not taxed. If income tax rates increase in 2011, the benefits of Section 529 plan contributions will increase as well.
In 2009 and 2010, the annual gift tax exclusion allows donors to make gifts of up to $13,000 ($26,000 for a married couple) to any number of individuals including children – without paying gift tax or using any of the $1 million lifetime gift tax exemption. As an alternative to cash, consider gifting a fundamentally sound asset with good prospects for future growth. This is an especially good technique to consider if you own real estate or closely-held stock.
In addition to interest rates being at historic lows, the "section 7520 rate" – the discount rate used by the Internal Revenue Service to value future cash flows for gift tax purposes – has also been very low in recent months, 3.2 percent, for example, for November of 2009, favoring strategies such as grantor retained annuity trusts or charitable lead annuity trusts. If you own an asset that you believe will appreciate at a rate greater than the current section 7520 rate, you may want to consider talking with your advisors about making gifts to the next generation now at minimal transfer tax cost.