An increase in the estate tax exemption for 2016 that takes individual estates valued at $5.45 million or less out of danger of being subject to federal estate taxes has now shifted taxpayer concern in Georgia and throughout the country from estate tax liabilities to income taxes that might be due on the capital gain when an asset is sold. The tax rate on a long-term capital gain can be as high as 33 percent for some people, but there are ways to save on taxes with a little planning.
A capital gain occurs when an asset, such as a vacation home, is sold for more than the price at which it was purchased. The cost basis of the home would be its purchase price plus any improvements, such as the addition of an extension, made to it that helped to increase its value. When the home is sold, the difference between its cost basis and the price for which it is sold is the capital gain on which a taxpayer might owe taxes.
Instead of transferring assets into a trust or giving them away as a gift in order to avoid estate taxes, a taxpayer might now consider retaining ownership of the assets. An asset that passes to an heir upon the death of its owner is subject to a step-up in the cost basis. This means that the heir’s cost basis of the asset is based upon its market value at the time of the death of its owner.
Taking full advantage of tax law changes might require changes to the estate plans taxpayers set up years ago. A tax attorney might be a good source of guidance and advice about use of the tax laws to reduce capital gain and individual income tax.