October 15, 2013

Now that the American Taxpayer Relief Act of 2012 has bumped the federal estate tax exemption up to $5.25 million, a recent article explains that many individuals are now turning their energy to estate planning maneuvers that will reduce their income tax bills.

Most income tax planning strategies are aimed at individuals who have a high net worth, yet do not anticipate their estate to be valued at or above $5.25 million upon their death. One popular strategy is making a loan to a family member or friend in a lower tax bracket at a low interest rate. The borrower can invest the money and take out the dividends, interest, and capital gains. Eventually the borrower will pay the loan back and the lender will have his or her money back so he or she can pay for retirement or medical expenses.

Like the maneuver described above, income tax planning often involves the shifting of assets in order to reduce the income tax liability on those assets. Incorporating a trust into the strategy may also fortify the plan to protect against creditors and State Estate taxes.