Some Tax Considerations to Keep

HOME SWAP One of the central concerns in the early part of the financial crisis was homeowners’ ability to pay their mortgages. Now, the federal government is giving people a tax credit for buying a home. People who sell one home and buy another for less than $800,000 by April 30 (June 30 if you’re in contract) will get a $6,500 tax credit. There are four caveats to this: the total value of the house has to be under the limit (an $805,000 house would not qualify), the buyers’ adjusted gross income has to be less than $245,000 a year for a couple, they have to have lived in their previous home for five of the last eight years and the new home can’t be purchased from a family member. The credit started on Nov. 7, 2009. So if you swapped homes between then and the end of April and meet the other criteria, you qualify. CAPITAL GAINS The capital gains debate is an old one, but good to repeat. As the law stands now, the long-term capital gains rate is set to rise to 20 percent, from 15 percent, next year. Congress has plenty of time to change this, but last year the same was said for lawmakers’ ability to address to estate tax. “I view this as the last call to rebalance your portfolio at 15 percent,” said David Hamar, a managing director at Silvercrest Asset Management. “This has been around, but there are still people out there who haven’t done it.” One particular area where people may be stuck is incentive stock options. If the options are set to expire, you have to exercise them. And to get the long-term capital gains rate, you need to hold them for at least one year. The consolation is that even if the rate rises next year, it is still lower than the short-term capital gains tax, which is the same as ordinary income. GIFT TRUSTS In the run-up in the stock market, a wildly popular device for passing money to heirs tax-free was a grantor retained annuity trust, or GRAT. One of the main benefits of these trusts was their short duration, often two years. This allowed the wealthy to put something they believed would go up in value into the trust — from stock to a stake in a private company that was about to be sold — and name a child or other heir as a beneficiary. The appreciated amount would pass to the heir, while the original value of the asset and a small amount of interest would come back to the person who set up the trust. But on March 17, the House Ways and Means committee approved a bill that would increase the minimum length of a GRAT to 10 years. While there has been a lot of debate over the extension since President Obama took office, Don Weigandt, a managing director at J. P. Morgan Private Bank, said this change is part of a broader bill — the Small Business and Infrastructure Jobs Tax Act of 2010 — that is likely to pass. “We’ve been talking to a lot of clients about this, saying the time to be able to do GRATs in the most effective way is slowly leaking away from us,” he said. Those who want to set up a shorter-duration trust have only until the date of the bill’s enactment to do it. CHARITY The other trusts widely used during the boom were charitable remainder trusts. These allowed people to put an asset in a trust — usually a concentrated stock position — and receive an annuity from it. The benefit to the taxpayer was an immediate gift tax deduction and deferral of the capital gains tax on the securities, and charities knew they would eventually receive the principal. Those whose financial circumstances have changed, for better or worse, since setting up a charitable trust have a couple of options, said Jennifer Immel, senior wealth planner at PNC Wealth. One option for those who need money immediately is to “collapse” the trust. The asset would go directly to the charity and the grantor would receive back a sum equivalent to the present value of the future annuity stream. This would mean a higher tax bill, but it would give the grantor all the money now.