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A Top Tax Savings Tip

Updated: May 22, 2021

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With COVID incomes down in 2020, there may be opportunity for good tax planning to help. For example, if your client holds an asset for one year and one day it is taxed at 15 percent or 20 percent, depending on adjusted gross income (AGI). Any asset that you sell that has been held less than a year and a day is taxed at the ordinary rate.

tax savings tip

If taxable income is up to $40,125 as a single individual, $80,250 if you are married, and $53,700 if you file as head of household (HOH), you may not owe any taxes on your sales of any security that you sell.

Say a married client has taxable income of $40,000, and $40,000 in stock sales then their AGI is $80,000. They are below the $80,250 threshold they may not owe any taxes on their securities sales. Now is the time to really talk with your clients that have this situation.

Further, if your clients fall out of the perimeter for a 0 percent capital gain tax, you can still work with them to harvest gains and losses in 2020. Let’s say a client sold $80,000 in securities, but then harvested their losses of $100,000 then you would have a $3,000 capital loss and the remainder would be carried forward. This would wipe out any lurking capital gains.

Any amount of capital gains received is taxed either as ordinary income or 15 percent or 20 percent, depending on AGI. The calculation of the gains is then added to all other income, to comprise AGI and after deductions you arrive at taxable income. The capital gains portion of the taxable income is figured differently than the ordinary taxable income. If that income falls below the 12 percent tax bracket then there is no capital gains tax due.

I had a client whose only income was Social Security and he and his wife wanted to give their grandchildren $30,000 a piece. He had a lot of Disney stock, so I told him to transfer the stock in the gift tax increments and give them to his two grandkids.

On the transfer he would have recognized 15 percent, however his taxable income was less than the threshold so he owed nothing. The grandkids, in turn, didn’t have a tax liability because their income was so low when they sold it.

As you can see there are many tax scenarios you can work out with your clients, but in doing your tax planning for them, this is one to consider.

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