There`s Not Much Time Left To Make Sure You`ve Minimized Your

Tax Bite

December 17, 1990|By Julian Block, Tribune Media Services.

It is none too soon for investors to review actions to take before the year ends to lessen the amount that winds up with the tax collectors. Here are some major issues that you should consider.

- Capital gains. These provide planning possibilities for many investors. For tax year 1990, the top rate is 28 percent, unless you are in the 33 percent ``bubble`` bracket. Starting in tax year 1991, the maximum rate for capital gains is capped at 28 percent, vs. 31 percent for ordinary income from sources like salaries, business profits, dividends and interest.

Despite the slight rate advantage to realizing gains after the new year, I advise you to be mindful of a time-tested admonition: Base your decision on when to sell stocks or other investments on how much you expect them to appreciate in the future, not just on the basis of tax advantages.

For example, do your holdings include some shares that you fear are about to slide in value? Better to unload now than to wait until next year. Still, all else being equal, it can pay for someone in the 33 percent bracket with an unrealized gain to delay the sale until after the close of 1990 and be taxed at no more than 28 percent.

- Capital losses. Note, too, that you remain able to offset capital gains with capital losses. What if gains are exceeded by losses? You can use the excess losses to offset up to $3,000 of ordinary income and carry forward any unused losses to 1991 and beyond, should that be necessary.

- Transfers to family members. There continues to be an important advantage for older investors who leave appreciated stocks and other assets to their children or other heirs. The basis of an asset is stepped up to its value at the date of death.

To illustrate, assume that a father paid $20,000 for stock that was worth $200,000 at his death, when his daughter inherited the shares. The value of that stock is ``stepped up`` to $200,000 when she takes ownership. The impact of that move comes when the daughter sells the stock. At that time, she escapes paying any income taxes on the amount the stock appreciated between the time her father bought it and the time he died; in other words, she doesn`t pay tax on the $180,000 increase in value. She is taxed only on the amount of appreciation since she inherited the stock.

Warning to heirs: Any estate taxes due from the father`s estate are figured on the stock`s date-of-death value, not original cost.

Another tactic is to make lifetime gifts of appreciated property to children or grandchildren who are at least age 14 and are in the 15 percent bracket. Why is age 14 the magic number? Because the kiddie tax rules require investment earnings above $1,000 from capital gains, dividends and the like received by a child under the age of 14 to be taxed at the parent`s top rate. Go back to the father in my previous example. Assume that while he was living he gave his daughter stock that originally had cost him $20,000 and now is valued at $200,000. Unlike inherited property, there is no stepup in basis for property given as a gift. In figuring gain on a later sale by her, the sales price is measured against his original cost of $20,000. In tax jargon, that`s a carryover of basis.

Nevertheless, going the gift route shifts the capital gain from the father to the daughter-a maneuver that remains advantageous, as long as she is in a lower bracket.