Given the skyrocketing cost of higher education, fewer and fewer families can afford college without some form of financial assistance. For many students, loans are what make the difference between attending college and not. But it’s important to plan these loans carefully to avoid a financial nightmare after graduation. Here are five tips for keeping student loans under control.
A better approach is to try to estimate your student’s monthly loan payments after graduation and determine whether his or her expected income is likely to meet all financial obligations — including the loan. Many resources are available to predict a grad’s job and income prospects based on major, degree, institution and other factors. These include PayScale College Salary Report (payscale.com) and the College Scorecard (collegescorecard.ed.gov).
If you expect a shortfall, there are several options to consider. For example, your student might work while in school to cover some living expenses or plan to live at home for a time after graduation. Your student could look for lower (or no-) cost financial aid, attend a less-expensive school or reconsider his or her field of study.
© 2017
Well-crafted, up-to-date estate planning documents are an imperative for everyone. They also can help ease the burdens on your family during a difficult time. Two important examples: wills and living trusts.
A will is a legal document that arranges for the distribution of your property after you die and allows you to designate a guardian for minor children or other dependents. It should name the executor or personal representative who’ll be responsible for overseeing your estate as it goes through probate. (Probate is the court-supervised process of paying any debts and taxes and distributing your property after you die.) To be valid, a will must meet the legal requirements in your state.
If you die without a will (that is, “intestate”), the state will appoint an administrator to determine how to distribute your property based on state law. The administrator also will decide who will assume guardianship of any minor children or other dependents. Bottom line? Your assets may be distributed — and your dependents provided for — in ways that differ from what you would have wanted.
Because probate can be time-consuming, expensive and public, you may prefer to avoid it. A living trust can help. It’s a legal entity to which you, as the grantor, transfer title to your property. During your life, you can act as the trustee, maintaining control over the property in the trust. On your death, the person (such as a family member or advisor) or institution (such as a bank or trust company) you’ve named as the successor trustee distributes the trust assets to the beneficiaries you’ve named.
Assets held in a living trust avoid probate — with very limited exceptions. Another benefit is that the successor trustee can take over management of the trust assets should you become incapacitated.
Having a living trust doesn’t eliminate the need for a will. For example, you can’t name a guardian for minor children or other dependents in a trust. However, a “pour over” will can direct that assets you own outside the living trust be transferred to it on your death.
There are other documents that can complement a will and living trust. A “letter of instruction,” for example, provides information that your family will need after your death. In it, you can express your desires for the memorial service, as well as the contact information for your employer, accountant and any other important advisors. (Note: It’s not a legal document.)
Also consider powers of attorney. A durable power of attorney for property allows you to appoint someone to act on your behalf on financial matters should you become incapacitated. A power of attorney for health care covers medical decisions and also takes effect if you become incapacitated. The person to whom you’ve transferred this power — your health care agent — can make medical decisions on your behalf.
These are just a few of the foundational elements of a strong estate plan. We can work with you and your attorney to address the tax issues involved.
© 2017
Every year, a substantial percentage of weddings aren’t first-time nuptials but second (or subsequent) marriages. Here are four tips to help such partners better manage the situation:
© 2017
Congress enacted the so-called “kiddie tax” rules to prevent parents and grandparents in high tax brackets from shifting income (especially from investments) to children in lower tax brackets. Congress recently revamped this tax under the Tax Cuts and Jobs Act (TCJA).
What changed? The TCJA only revises the kiddie tax rate structure. The rest of the kiddie tax rules are the same as before. Here’s what you need to know about how this tax can come into play under the new law.
Use the following tax rates to compute the kiddie tax for 2018 to 2025:
| 10% tax bracket | $0 – $2,550 |
| 24% tax bracket | $2,551 – $9,150 |
| 35% tax bracket | $9,151 – $12,500 |
| 37% tax bracket | $12,501 and above |
| 0% tax bracket | $0 – $2,600 |
| 15% tax bracket | $2,601 – $12,700 |
| 20% tax bracket | $12,701 and above |
Important note: For simplicity, throughout this article we use the terms “child” and “children” to apply to both children and young adults under age 24 who may be subject to the kiddie tax.
For 2018 through 2025, the TCJA revises the kiddie tax rules to tax a portion of a child’s net unearned income at the rates paid by trusts and estates. These rates can be as high as 37% for ordinary income or, for long-term capital gains and qualified dividends, as high as 20%. (See “Trust and Estate Tax Rates for 2018,” at right.)
The trust and estate tax rate structure is unfavorable because the rate brackets are compressed compared to the brackets for single individuals. In other words, the kiddie tax rules can override the lower rates that would otherwise apply to an affected child’s unearned income.
By comparison, under prior law, the kiddie tax rules taxed a portion of an affected child’s unearned income at the parent’s marginal tax rate if that rate was higher than the child’s rate. For 2017, the parent’s rate could be as high as 39.6% for ordinary income or, for long-term capital gains and dividends, as high as 20%.
Important note: For purposes of the kiddie tax rules, the term “unearned income” refers to income other than wages, salaries, professional fees and other amounts received as compensation for personal services rendered. Examples of unearned income include capital gains, dividends and interest. Earned income from a job or self-employment isn’t subject to the kiddie tax.
In calculating the federal income tax bill for a child who’s subject to the kiddie tax, the child is allowed to deduct his or her standard deduction. For 2018, if the TCJA hadn’t passed, the standard deduction for a child for whom a dependent exemption deduction would have been allowed under prior law is the greater of:
For 2018, the kiddie tax potentially affects children who don’t provide over half of their own support in 2018 and who live with their parents for more than half of the year.
The kiddie tax can potentially apply until the year that a child turns age 24. More specifically, the kiddie tax applies when all four of the following requirements are met for the tax year in question:
1. The child doesn’t file a joint return for the year.
2. One or both of the child’s parents are alive at the end of the year.
3. The child’s net unearned income for the year exceeds the threshold for that year, and the child has positive taxable income after subtracting any applicable deductions, such as the standard deduction. The unearned income threshold for 2018 is $2,100. If the unearned income threshold isn’t exceeded, the kiddie tax doesn’t apply. If the threshold is exceeded, only unearned income in excess of the threshold is hit with the kiddie tax.
4. The child falls under one of the following age-related rules:
Rule 1. The child is 17 or younger at year end.
Rule 2. The child is 18 at year end and doesn’t have earned income that exceeds half of his or her support. (Support doesn’t include amounts received as scholarships.)
Rule 3. The child is age 19 to 23 at year end and 1) is a student, and 2) doesn’t have earned income that exceeds half of his or her support. A child is considered to be a student if he or she attends school full-time for at least five months during the year. (Again, support doesn’t include amounts received as scholarships.)
Here are several examples to help you understand who could be hit with the kiddie tax after the changes made by the TCJA:
Adam will be 17 on December 31, 2018. So, he falls under Rule 1 (above). For 2018, he will be subject to the kiddie tax if the other three requirements are also met.
Beth will be 19 on December 31, 2018. She doesn’t have any earned income for the year, and she’s a full-time student for the entire year. She falls under Rule 3. For 2018, she will be subject to the kiddie tax if the other three requirements are also met.
Claire is 19 on December 31, 2018. She’s not a student for 2018, so Claire is exempt from the kiddie tax for 2018.
Dennis will be 21 on December 31, 2018, and he graduates from college in May 2018. He qualifies as a full-time student, because he’s enrolled for the first five months of the year. Dennis couldn’t find a job after graduation, so he doesn’t provide over half of his own support for the year. Therefore, he’s subject to the kiddie tax for 2018 under Rule 3, if the other three requirements are also met.
Ellie will be 24 on December 31, 2018. Even though Ellie is still enrolled in college, she’s exempt from the kiddie tax for 2018 and all subsequent years, because none of the age-related rules apply to her.
There are four steps when calculating the federal income tax bill under the kiddie tax rules.
1. Add up the child’s net earned income and net unearned income.
2. Subtract the child’s standard deduction to arrive at taxable income.
3. Compute tax for the portion of taxable income that consists of net earned income using the regular rates for a single taxpayer. (See “Computing Tax on a Child’s Earned Income,” below.)
4. The kiddie tax will be assessed on the portion of taxable income that consists of net unearned income and that exceeds the unearned income threshold. (That threshold is $2,100 for 2018.) Compute kiddie tax for this amount using the rates that apply to trusts and estates. (See “Trust and Estate Tax Rates for 2018,” above.)
To illustrate how to calculate a child’s federal tax bill, let’s look at one of the previous examples. Adam (age 17) has $2,000 of earned income from delivering newspapers and $7,000 of unearned ordinary income. His standard deduction is $2,350 ($2,000 of earned income + $350).
Adam’s taxable income is $6,650 ($2,000 + $7,000 − $2,350). The entire $6,650 is treated as unearned income because his $2,350 standard deduction offsets all of his earned income plus the first $350 of his unearned income.
The first $2,100 (the amount up to the kiddie tax unearned income threshold) is taxed at 10% under the regular rates for single taxpayers, resulting in $210 of tax.
The remaining $4,550 of taxable income ($6,650 – $2,100) falls under the kiddie tax rules and is, therefore, taxed at the rates for trusts and estates as follows:
So Adam’s tax bill is $945 ($210 + $255 + $480).
Important note: Without the kiddie tax, all of Adam’s $6,650 of taxable income would have been taxed at 10% under the regular rates for single taxpayers, resulting in only $665 of tax.
The kiddie tax is somewhat easier to calculate under the TCJA. But it can still be confusing. Depending on your circumstances, your children or grandchildren may be hit even harder by the kiddie tax under the new rules. If your child or grandchild has significant unearned income, contact your tax advisor to identify strategies that will help reduce the kiddie tax for 2018 and beyond.
Computing Tax on a Child’s Earned Income2018 Ordinary Income Tax Rates for Single Taxpayers
2018 Long Term Capital Gains and Qualified Dividends Tax Rates for Single Taxpayers
Standard DeductionsFor dependents with only unearned income, the standard deduction is $1,050. For dependents with earned income, the standard deduction is the greater of: 1) $1,050, or 2) earned income plus $350, not to exceed $12,000. For nondependent single taxpayers, the standard deduction is $12,000. |
© Copyright 2018. All rights reserved.
Brought to you by: McClanathan, Burg & Associates, LLC
Keeping up with the complexity of the Internal Revenue Code is challenging for an individual and even more so for a business owner. But, if you’re someone who handles both roles — an owner-employee — the difficulty level is particularly high. Nonetheless, it’s important to stay up to speed on your specific obligations. As you’re no doubt aware, much depends on the structure of your company.
Generally, all trade or business income that flows through to you for income tax purposes is subject to self-employment taxes — even if the income isn’t actually distributed to you. But such income may not be subject to self-employment taxes if you’re a limited partner or member of a limited liability company whose ownership is equivalent to a limited partnership interest. Whether the additional 0.9% Medicare tax on earned income or the 3.8% net investment income tax (NIIT) applies also is complex to determine.
Under an S corporation, only income you receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. To reduce these taxes, you may want to keep your salary relatively — but not unreasonably — low and increase your distributions of company income (which generally isn’t taxed at the corporate level or subject to the 0.9% Medicare tax or 3.8% NIIT).
For C corporations, only income you receive as salary is subject to employment taxes. If applicable, the 0.9% Medicare tax may be due as well. Nevertheless, you may prefer to take more income as salary (which is deductible at the corporate level) as opposed to dividends (which aren’t deductible at the corporate level, are taxed at the shareholder level and could be subject to the 3.8% NIIT) if the overall tax paid by both the corporation and you would be less. Warning: The IRS is cracking down on misclassification of corporate payments to shareholder-employees, so tread carefully.
As this article went to press, tax law reform efforts were underway that may affect some of this article’s content. Please contact our firm for the latest information.
© 2017
This tax calendar notes important tax deadlines for the first quarter of 2018.
January 16 — Individual taxpayers’ final 2016 estimated tax payment is due.
January 31 — File 2017 Forms W-2 (“Wage and Tax Statement”) with the Social Security Administration and provide copies to your employees.
February 28 — File 2017 Forms 1099-MISC with the IRS.
March 15 — 2017 tax returns must be filed or extended for calendar-year partnerships and S corporations. If the return is not extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.
© 2017
The Tax Cuts and Jobs Act (TCJA) provides businesses with more than just lower income tax rates and other provisions you may have heard about. Here’s an overview of some lesser-known, business-friendly changes under the new law, along with a few changes that could affect some businesses adversely.
Many of the new law’s provisions will reduce the amount of taxes your business will owe, starting in 2018. Here are four examples that you might not be familiar with:
1. Faster Depreciation for Certain Real Property
For property placed in service after December 31, 2017, the separate definitions of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are eliminated. Under the TCJA, those items are now lumped together under the description of qualified improvement property, which can be depreciated straight-line over 15 years.
2. Faster Depreciation for New Farming Machinery and Equipment
The TCJA shortens the depreciation period from seven years to five years for new machinery and equipment that is placed in service after December 31, 2017, and used in a farming business (other than grain bins, cotton ginning assets, fences or other land improvements). In addition, the faster double-declining balance method can be used to calculate annual depreciation deductions for these types of machinery and equipment.
3. New Credit for Employer-Paid Family and Medical Leave
For wages paid tax years beginning after December 31, 2017, and before January 1, 2020, the TCJA allows employers to claim a general business tax credit equal to 12.5% of wages paid to qualifying employees while they’re on family or medical leave. There’s a hitch: You must pay the employee at least 50% of his or her normal wage while on leave.
Additionally, the credit rate increases by 0.25% for each percentage point that the wage rate paid while on leave exceeds 50% of the normal rate. However, the maximum credit rate is 25%. For example, if you pay an employee 60% of her normal wage rate while on leave, you could qualify for a general business credit equal to 15% (12.5% + (10 x 0.25%)), if all other conditions are met.
Important: To be eligible for the credit, the employer must provide all qualifying full-time employees at least two weeks of annual paid family and medical leave. Part-time employees must be given proportional leave time.
4. Accounting Change for Long-Term Construction Contracts
Under prior law, construction companies were generally required to use the less-favorable percentage-of-completion method (PCM) to calculate annual taxable income from long-term contracts for the construction or improvement of real property. However, construction companies with average annual gross receipts of $10 million or less in the preceding three tax years were exempt from this requirement.
The TCJA expands this exemption to cover contracts for the construction or improvement of real property if they:
Are expected to be completed within two years, and
Are performed by a taxpayer with average annual gross receipts of $25 million or less for the preceding three tax years.
This beneficial change is effective for contracts entered into in 2018 and beyond.
The tax breaks provided by the TCJA will cost the federal government a significant amount of revenue. As a result, the bill needed to raise revenue through other tax law changes. Here are two examples:
1. Less Favorable Treatment of Carried Interests
Historically, private equity funds and hedge funds have been structured as limited partnerships. Under prior law, carried interest arrangements allowed private equity fund and hedge fund managers to give up their right to receive current fees for their services and, instead, receive an interest in future profits from the private equity/hedge fund partnership. These arrangements are called “carried interests” because a private equity/hedge fund manager doesn’t pay anything for the partnership profits interest. To add to the appeal, the private equity/hedge fund manager isn’t taxed on the receipt of the carried interest (because it’s not considered to be a taxable event).
The tax planning objective of carried interest arrangements is to trade current fee income for partnership profits interest. Current fee income would be treated as high-taxed ordinary income and subject to federal employment taxes. But a partnership profits interest is expected to generate future long-term capital gains that will be taxed at lower rates.
For tax years beginning after 2017, carried interest arrangements face a major hurdle: The TCJA imposes a three-year holding period requirement in order for profits from certain partnership interests received in exchange for the performance of services to be treated as low-taxed, long-term capital gains.
2. Self-Created Intangible Assets No Longer Treated as Capital Assets
Effective for dispositions in 2018 and beyond, the TCJA stipulates that certain intangible assets can no longer be treated as favorably-taxed capital gain assets. This change affects:
The change will cover the above types of intangibles that are 1) created by the taxpayer, or 2) acquired from the creating taxpayer with the new owner’s basis in the intangible determined by the creating taxpayer’s basis. The latter situation could happen if the creating taxpayer gifts an intangible to another individual or contributes an intangible to another taxable entity, such as a corporation or partnership.
If you’re feeling overwhelmed by the new tax law, you’re not alone. The TCJA is expected to have far-reaching effects on business taxpayers. Contact your tax advisor to review the substance of the bill and how your company can manage the impact.
© Copyright 2018. All rights reserved.
Brought to you by: McClanathan, Burg & Associates, LLC
Will pass-through entities still be popular under the Tax Cuts and Jobs Act (TCJA)? The tax rules for pass-through entities, including S corporations, limited liability companies (LLCs), partnerships and sole proprietorships, have generally become more beneficial — but also more confusing under the new law.
So which type of entity is best for your business? The answers depend on several factors, which are explained in this article.
Under prior law, net taxable income from so-called pass-through business entities (meaning sole proprietorships, partnerships, LLCs that are treated as sole proprietorships or as partnerships for tax purposes, and S corporations) was simply passed through to owners and taxed at the owner level at standard rates.
For tax years beginning after 2017, the TCJA establishes a new deduction based on a noncorporate owner’s qualified business income (QBI). This break is available to eligible individuals, estates and trusts. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels. The QBI deduction isn’t allowed in calculating the noncorporate owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it is treated the same as an allowable itemized deduction.
This break is subject to the following restrictions:
W-2 Wage Limitation. For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the noncorporate owner’s share of: 1) 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or 2) the sum of 25% of W-2 wages plus 2.5% of the cost of qualified property. Qualified property means depreciable tangible property (including real estate) owned by a qualified business as of the tax year end and used by the business at any point during the tax year for the production of qualified business income.
Under an exception, the W-2 wage limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500, or $315,000 for a married joint filer. Above those income levels, the W-2 wage limitation is phased in over a $50,000 phase-in range or a $100,000 range for married joint filers.
Service Business Limitation. The QBI deduction is generally not available for income from specified service businesses, such as most professional practices. Under an exception, the service business limitation does apply until an individual owner’s taxable income exceeds $157,500, or $315,000 for a married joint filer. Above those income levels, the W-2 wage limitation is phased in over a $50,000 phase-in range or a $100,000 range for married joint filers.
Important note: The W-2 wage limitation and the service business limitation don’t apply as long as taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.
In general, distributions by a C corporation to its shareholders are treated as taxable dividends to the extent of the corporation’s earnings and profits (E&P). However, a special “posttermination transition period” rule provides relief to shareholders of a corporation that changes from S corporation status to C corporation status.
During this period, any distribution of money by the corporation to its shareholders is first applied to reduce the basis of the shareholder’s stock to the extent the distribution doesn’t exceed the accumulated adjustments account (AAA) balance that was generated during the company’s life as an S corporation. Such distributions of AAA amounts are tax-free to recipient shareholders.
The TCJA modifies the posttermination transition period relief rule for C corporations that:
Distributions from such corporations are treated as paid pro-rata from AAA and E&P. This can result in more of a distribution being treated as a taxable dividend and less being treated as a tax-free distribution of AAA. This change is intended to discourage the tax planning strategy of converting S corporations to C corporation status in order to take advantage of the new flat 21% federal income tax rate on C corporation income.
As a general rule, trusts cannot be S corporation shareholders. However, an exception allows electing small business trusts (ESBTs) to be S corporation shareholders. Under prior law, an ESBT couldn’t have a current beneficiary who was a nonresident alien individual.
Thanks to a change included in the new law, such individuals can now be ESBT beneficiaries. This change is effective for 2018 and beyond.
Under prior law, a partnership (or an LLC that’s treated as a partnership for tax purposes) is considered to terminate for tax purposes if, within a 12-month period, there’s a sale or exchange of 50% or more of the entity’s capital and profits interests. This so-called “technical termination rule” is generally unfavorable.
Why? First, the rule can require the filing of two short-period tax returns for the tax year in which the technical termination occurs. It also restarts depreciation periods for the entity’s depreciable assets. In addition, it terminates favorable tax elections that were made by the entity.
The TCJA repeals the technical termination rule for tax years beginning in 2018 and beyond.
In general, a partnership (or an LLC that’s treated as a partnership for tax purposes) must reduce the tax basis of its assets upon the transfer of an ownership interest if the entity has a substantial built-in loss. (A built-in loss happens when the fair market value of the assets is less than their tax basis.)
This rule is unfavorable, because the basis reduction can result in lower depreciation and amortization deductions. Under prior law, a substantial built-in loss exists if the entity’s adjusted basis in its assets exceeds their fair market value by more than $250,000.
Under the TCJA, a substantial built-in loss also exists if, immediately after the transfer of an interest, the recipient of the transferred interest would be allocated a net loss in excess of $250,000 upon a hypothetical taxable sale of all of the entity’s assets for proceeds equal to fair market value. This unfavorable expansion of the built-in loss rule applies to ownership interest transfers in 2018 and beyond.
Under a loss limitation rule, a partner (or an LLC member that’s treated as a partner for tax purposes) can’t deduct losses in excess of the tax basis in the partnership or LLC interest.
The new law changes the rules for charitable gifts and foreign taxes. For tax years beginning after December 31, 2017, an owner’s share of a partnership’s (or LLC’s) deductible charitable donations and paid or accrued foreign taxes reduces the owner’s basis in the interest for purposes of applying the loss limitation rule. This change can reduce the amount of losses that can be currently deducted.
However, for charitable donations of appreciated property (where the fair market value is higher than the tax basis), the owner’s basis isn’t reduced by the excess amount for purposes of applying the loss limitation rule. In other words, the owner’s tax basis in the interest is reduced only by the owner’s share of the basis of the donated appreciated property for purposes of applying the loss limitation rule.
As you can see, the tax landscape for various business entities has changed considerably under the new tax law. The type of entity that’s best for you depends on the industry you’re in, your income and many other factors. Consult with your tax advisor and attorney to determine the most tax-wise way to proceed.
© Copyright 2018. All rights reserved.
Brought to you by: McClanathan, Burg & Associates, LLC
In many parts of the country, the dog days of summer are a good time to stay inside. If you’re looking for a practical activity while you beat the heat, consider organizing your tax records. Granted, it may not be as exhilarating as jumping off the high dive, but a dip into these important documents now may save you a multitude of headaches later.
Generally, you should keep tax-related records as long as the IRS has the ability to audit your return or assess additional taxes — in other words, until the statute of limitations expires. That means three years after you file your return or, if later, three years after the tax return’s original due date.
In some cases, the statute of limitations extends beyond three years. If you understate your adjusted gross income by more than 25%, for example, the period jumps to six years. And there’s no statute of limitations if you fail to file a tax return or file a fraudulent one.
Although the IRS statute of limitations is a good rule of thumb, there are exceptions to consider. For example, it’s wise to keep your tax returns themselves indefinitely because you never know when you’ll need a copy of your individual income tax return.
For one thing, the IRS often destroys original returns after four or five years. So if the IRS comes back 10 years later and claims you never filed a return for a particular year, it can assess tax for that year even though the limitations period for properly filed returns has long since expired. As you can see, it would be difficult to defend yourself without a copy of your tax return.
W-2 forms also are important to keep at least until you start receiving Social Security benefits. You may need them if there’s a question about your work record or earnings in a particular year.
If you have property records, it’s ideal to keep closing documents and records related to initial purchases and capital improvements until at least three years (preferably six years in case you understated your income by more than 25%) after you file your return for the year in which you sell the property.
When it comes to sales of stocks or other securities, retain purchase statements and trade confirmations until at least three years (preferably six years) after you file your return for the year in which you sell these stocks or other securities.
Many years’ worth of tax and financial records can accumulate like grains of sand on your favorite beach. So the better your documentation is organized, the easier time you’ll have filing your return every year and dealing with any IRS surprises. Our firm can assist you in determining what you should keep.
© 2017
If you’re an investor looking to save tax dollars, your kids might be able to help you out. Giving appreciated stock or other investments to your children can minimize the impact of capital gains taxes.
For this strategy to work best, however, your child must not be subject to the “kiddie tax.” This tax applies your marginal rate to unearned income in excess of a specified threshold ($2,100 in 2017) received by your child who at the end of the tax year was either: 1) under 18, 2) 18 (but not older) and whose earned income didn’t exceed one-half of his or her own support for the year (excluding scholarships if a full-time student), or 3) a full-time student age 19 to 23 who had earned income that didn’t exceed half of his or her own support (excluding scholarships).
Here’s how it works: Say Bill, who’s in the top tax bracket, wants to help his daughter, Molly, buy a new car. Molly is 22 years old, just out of college, and currently looking for a job — and, for purposes of the example, won’t be considered a dependent for 2017.
Even if she finds a job soon, she’ll likely be in the 10% or 15% tax bracket this year. To finance the car, Bill plans to sell $20,000 of stock that he originally purchased for $2,000. If he sells the stock, he’ll have to pay $3,600 in capital gains tax (20% of $18,000), plus the 3.8% net investment income tax, leaving $15,716 for Molly. But if Bill gives the stock to Molly, she can sell it tax-free and use the entire $20,000 to buy a car. (The capital gains rate for the two lowest tax brackets is generally 0%.)
© 2017
