Did you know that most everything you own, whether it is personal or business, is considered a capital asset? Examples of personal capital assets are: home, recreational vehicles, stocks and bonds. Business assets include but are not limited to: buildings, tractors, trailers, and other business equipment.
When a capital asset is sold, the difference of the basis and the sale price may be taxable and reported on the year-end tax return. Remember all capital gains must be reported. However, personal property losses cannot be ducted, only investment property. When considering selling a capital asset the taxpayer should consider what the tax implications will be. The following are some tax strategies that may help in planning for the tax year.
- 3.8% Medicare tax: In 2013, under the health care act for high income tax payers, the additional 3.8% Medicare tax was created. Taxpayers with a MAGI (Modified Adjusted Gross Income) over $200,000 ($250,000 for married filing jointly and $125,000 for those filing single) per year may owe the new Medicare tax. So many of the strategies that can help you save capital gains taxes can also help you save the additional Medicare taxes.
- Use losses: Consider selling any assets that are currently at a loss and are unlikely to regain footing to use against any capital gains you had during the year. Any capital losses can offset capital gains. If your losses exceed your gains then you are able to offset your income by $3000 a year.
- Hold onto the asset: Short-term assets are any that are held one year or under. Long-term assets are held over one year. If you consider selling your short-term assets, rethink keeping them until they have reached the long-term timetable. With the short-term assets capital gain tax rate maximum increasing from 35% to 39.6% and from 15% to 20% for long term in 2013, it makes sense to keep the assets an extra day or even an extra month or two. Increasing the holding period of the asset will bring the taxpayer into the long term asset tax rate, thus reducing the taxes paid.
- 0% tax rate: Lower income individuals may have a 0% tax rate. If you’re ordinary income is in the low income threshold it may make sense to sell the asset you’ve been on the fence about. If you are not a lower income, it is possible one of your adult children over 24 may be in the lower income and it would make sense to transfer the property to them. You can gift up to $14,000 to each recipient per year.
- Like kind exchange: If you’re debating selling your business asset, consider instead to trade it in for a like asset. If you trade business assets in for a like asset you can defer the gain.
- Consider rebalancing your portfolio: Placing investments that produce ordinary income into tax deferred accounts may be the road to take. If you put your income producing assets into accounts like an IRA, 401 (k) or a deferred tax saving account, you can defer that income until later thus avoiding, for now, the higher tax rates.
Tax planning is about looking at the big picture. It’s about looking at all your investments personal and business and adjusting the treatments of each investment property. Remember to make your investments work for you not against you.