When it comes to tax savings one of the best tax strategies is income shifting. If your parents or grandparents are retired and in low tax brackets, income shifting can be appealing. That’s especially true if you are providing financial support.
Taxpayers in the lowest two federal tax brackets pay only 5% on qualified dividend income. This covers most dividends paid on stock market investments and income distributions from mutual funds holding stocks. The same low tax rate applies to long-term gains, which are profits from assets sold after they have been held for more than a year. The 5% tax rate is scheduled to drop to 0% in 2008, 2009, and 2010 before returning to 20% in 2011. Higher bracket taxpayers pay 15% on dividends and long-term gains, through 2010.
In 2007, single taxpayers can have up to $31,850 in taxable income and get the 5% rate. Couples filing jointly can have taxable income up to $63,700. In 2008 through 2010, when the 0% rate kicks in, those limits will move up a bit, to reflect inflation.
In order to reduce the family tax bill, transfer shares of dividend-paying stocks and stock funds to older relatives in a low tax bracket. You can give up to $12,000 worth of assets to any number of recipients each year without gift tax consequences. Married couples can give $24,000 per recipient this year.
A single person, over 65 can have up to $10,050 in dividend income, tax free, sheltered by the standard deduction and the personal exemption this year. A couple over 65 would have a shelter of $19,600 this year. In addition, dividend income up to $31,850 for single filers ($63,700 joint) will be taxed at only 5% this year. During 2008 through 2010, this income would be tax-free.
“Tax Tips” are the opinions of Executive Accounting Solutions, which is not a substitute for individual accounting, tax, and professional services since individual situations vary.