Many Americans hold on to their long-term capital assets for two reasons. First, they simply do not want to pay capital gains taxes, and second, they don’t want to lose the tax benefit that the stepped-up basis at death provides to their beneficiaries. To avoid either or both of these contingencies, they simply let their money sit, even if holding the asset is not in their best interest.
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) offers an opportunity for certain clients to move these assets, however, and pay no capital gains tax. With the right kind of rider, your clients can also retain the benefits of a stepped-up tax basis for their beneficiaries.
TIPRA: How it works, how to use it
Simply stated, TIPRA is a temporary tax break for those in the 10 to 15 percent tax bracket (in 2008, joint taxable income up to $65,100). Initially, it replaced the standard maximum long-term capital gains tax rate of 10 percent with a lower rate of 5 percent. In January 2008, the rate dropped again to 0 percent. That rate remains in effect through 2010, at which point a sunset provision kicks in — unless there is new legislation — and the tax reverts to the old level of 10 percent.
You can take a few simple steps to help your clients gain the benefits of TIPRA while it is still in effect. Begin with a comprehensive fact-finding session. Determine your clients’ objectives, insurance and liquidity needs, tax brackets, investments, and health and financial status. Based on the information you gather, offer all options that are suitable for their particular situation and goals. If clients choose to take advantage of the TIPRA tax provision, they should not transfer the funds as a lump sum. That could boost them into the next tax bracket, which would disqualify them for this special tax treatment. Instead, from 2008 through 2010, they can move the nonqualified money in increments into a suitable fixed index annuity with a premium bonus.