Most folks think what I’m about to talk about is also known as estate planning. Far from it!
On a regular basis, we see carryover items on a decedent’s tax return that are lost at their death. With a little planning, these can be taken advantage of and save some significant taxes.
I think the No. 1 item is capital loss carryovers. Usually an elderly person may have accumulated a lot of losses and they still have a substantial stock portfolio. The heirs get a step up in basis at death and the final decedent’s individual income tax return reports the lost capital loss carryover. (It flies away, never to be seen again).
A better way would be for somebody in their last few years of life to sell those highly appreciated assets, recognize the gain, offset by the capital loss, paying ZERO tax! Converting these holdings to cash locks in the highly appreciated value and the inheritance for the beneficiaries is locked in and protected from any future market drops.
On the other hand, property subject to depreciation recapture (at ordinary tax rates) should probably not be sold to offset capital loss carryovers. Why? Because the depreciation recapture is taxed at ordinary tax rates and not offset by any capital loss carryover. A better strategy for those kinds of assets is to hold the property until death — the heirs inherit it at its current fair market value and the recapture of depreciation goes away.
But wait! There’s another “on the other hand.” If you have substantial passive activity loss carryovers on that depreciable property, selling it before death would allow you to take those accumulated passive activity losses. If they’re greater than the depreciation recapture amount, then it may be a better idea to sell the depreciable property to offset its gain against capital loss carryovers.
I haven’t even talked about net operating loss carryovers, charitable contribution carryovers, savings bond interest, business credit carryovers, alternative minimum tax credits, etc., all of which have their own complex set of circumstances that can put the average brain into orbit because it’s spinning so hard.
Confused yet? Even I get mixed up occasionally. OK, my wife says it’s not “occasionally.” But if this can send my poor little head spinning sometimes, it usually does it to just about everybody else. That’s why it’s important to sit down with your CPA when you feel you’re within a couple of years or less of your “final chapter.” (Maybe you have a deadly illness or health issue, etc). In a rational, unrushed manner, you and your CPA can work through all the complex issues and come up with a plan you can follow while taking all the money you can out of the hands of Uncle Sam. Now, wouldn’t that help you “rest in peace” knowing Uncle Sam got less?
Have you heard? Proverbs 15:22 says, “Without counsel, plans go awry, but in the multitude of counselors they are established.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. He’s on the web at BullisAndCo.com and also on Facebook.