You’re better off when your money works for you instead of the other way around!
That’s usually the result when you are investing according to a well-constructed financial plan. Not only do sound investments grow over the years, from a tax perspective that growth tends to cost you less. Here’s why:
• Should a loved one pass, the TCJA dramatically increased the amount of assets Uncle Sam can’t reach under the federal estate tax.
• Since the passage of the Tax Cuts and Jobs Act (TCJA), the amount of investment profits that are taxed at lower capital gains rates has increased.
• When assets are held for a long period of time before they are sold, they qualify for the lowest long-term capital gains tax rate.
• Inflation also works in your favor as thresholds and brackets are adjusted.
Long term capital gains are one side of the double edge asset sword, the other is short term capital gains. Short term gains apply when you sell an asset after holding it for one year or less. The tax you pay on profit from the sale is the same as your ordinary income tax rate – OUCH!
The long-term capital gains tax rates are: 0%, 15%, and 20%. Which one applies depends on your overall income and filing status. The TCJA created specific long-term capital gains tax rates adjusted for inflation. See the table below for the income brackets to which the 2020 long-term capital gains taxes apply.
(In addition to capital gains tax rates listed in the tables, higher-income taxpayers may also have to pay an additional 3.8% net investment income tax. There are other capital gains tax rates for assets like collectibles, but they aren’t affected by inflation).
Uncle Sam also collects capital gains taxes on estates and trusts. For 2020, the maximum zero rate applies to estates or trusts worth up to $2,650. The top earnings level for an estate or trust to be taxed at 15 percent is $13,150. The 20% rate applies to these entities worth $13,151 or more.
The federal estate tax exclusion amounts have over the years been adjusted for inflation. The annual inflation adjustments keep increasing the amount that we can leave at death and not have it face any federal estate tax. For 2020, inflation bumps up the estate tax exclusion so that a wealthy individual can leave heirs a tax-free estate of up to $11.58 million vs $11.4 million per person in 2019. “Per person” translates to an estate tax exemption amount of $23.16 million for a married couple.
So what does all this mean? Time is on your side, and inflation could be a friendly trend. Consider holding on to an asset long enough to qualify for the long-term capital gains tax rates if possible.
Reach Out To Us: Get educated about the potential impact of tax-efficient investment decisions on your portfolio and income. Our TFG financial advisory team will work with you to help you build a tax–efficient, well-diversified portfolio, allocated and tailored to your risk profile. Feel free to contact me, Cory Lyon, Financial Advisor, directly at 561-209-1120, with any questions regarding financial planning. TFG Financial Advisors offers a complimentary, no obligation, 360 degree portfolio audit to help you assess where you stand and what opportunities may exist. At TFGFA, we believe in customized investment portfolio design and personalized asset management. I act as a fiduciary for my clients.
TFG Financial Advisors, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.
