Planning to Minimize Income Taxes

When the federal estate and gift tax exemption was raised to $5.25 million for 2013, many Americans were relieved that they would not have to worry about federal estate taxes. However, taxes have been, and always will be a focal point of estate planning. As a recent article discusses, where the emphasis has been removed from avoiding estate taxes, it has shifted to planning to reduce income taxes.

For a person in the top tax bracket, income taxes will shave off approximately 43 percent of his or her income. Therefore, as senior director of wealth planning for Wells Fargo Jay Messing explains, many clients now have “less need to do tax-focused estate planning and more need to do income tax planning.”

One tool Messing often recommends to families wishing to avoid income taxes is to make interfamily loans to children or other family members who are in lower tax brackets. The rates for these loans – which are set by the IRS – are considerably low. Importantly, income made by the loaned money is taxed at the family member’s low tax bracket.

Before the gift tax exemption was made permanent, Messing would have recommended an outright gift to the children, as it would reduce the size of the giver’s estate and therefore reduce estate tax liability. However, for most clients this is unnecessary given the $5.25 million exemption amount.

For assistance in planning to minimize your income taxes, contact us at (626) 696-3145.

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