Do you plan to sell securities for a profit in a taxable account anytime soon, perhaps to pay college bills or to buy a home? If so, you may want to sell in 2011 while tax rates are at low levels. You’ll owe no more than 15 percent on long-term capital gains realized in 2011, and some people expect that rate will soon move higher.
Even better, you may be able to shift your long-term capital gains to loved ones who’ll owe no tax in 2011. Suppose Dave and Emily Franklin have two children, age 19 and 22, both of whom are full-time college students. To pay their college bills, the Franklins expect to sell some mutual fund shares that have gained value. The Franklins may be able to avoid capital gains tax if they transfer the fund shares to their children before the sale.
As full-time students under age 24, the Franklin children are subject to the “kiddie tax.” They can sell appreciated assets and owe 0 percent tax under rules in effect in 2011, but that tax break is capped at $1,900 in unearned income this year.
Suppose that the two students will each have $100 in interest from bank accounts this year and no other investment income. They can each take up to $1,800 in long-term capital gains in 2011 and owe 0 percent tax on the sale. Thus, Dave and Emily might want to transfer fund shares that they intend to sell to their children, who can each take up to $1,800 of untaxed gains in 2011.