One thing most investors have in common is dealing with capital gains and losses in their investment accounts. The capital gains tax can be a deterrent, particularly where the investor doesn’t have any losses to set off against those gains. The good news is that under current tax law, it is not necessary that the investor die in order to allow his or her heirs to take advantage of the step-up in basis so that the gains in the investments can avoid the capital gains tax.
Where an investor has total income from all sources that is lower than the top of the 12% tax bracket plus the standard (or itemized) deductions, the tax on that portion of income which is capital gains will be zero. Now the top of the 12% bracket is not all that high ($38,600 for individuals and $77,200 for joint filers) and although your capital gains may not be taxed, other income after deductions will be subject to the applicable bracket rate. So this technique benefits those taxpayers, often recent retirees, who have little or no earned income.
Those investors who have some choice or control over where they take income – from taxable investment accounts as opposed to other assets or income streams – will be able to make the most of this technique. Remember that qualified retirement plans or other tax deferred accounts do not recognize capital gains and will instead give one ordinary income on distributions and never capital gains no matter how low your income. This makes it clear that deferring that source of income as long as possible allows one to benefit from the beneficial treatment of realized capital gains in the taxable investment accounts.
If you are not certain whether you can benefit from this approach, discuss your options with your accountant or investment adviser. The window for transactions affecting your 2018 income tax is coming to a close.