Key Numbers You Need To Know For 2021

Every year I compile a list of Key Numbers to serve as a reference guide for anyone in the financial industry and their clients. This is one of my most requested pieces, and you can download a copy here.

Below are a handful of numbers people ask me about most frequently.

Assets Subject to Capital Gains Tax

What assets are subject to capital gains tax? Unfortunately, “Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset,” according to the IRS. [1]  

Assets subject to the tax include:

• Stocks and bonds
• A home owned and occupied by you and your family
• Household furnishings
• A car used for pleasure or commuting
• Coin or stamp collections
• Gems and jewelry
• Gold, silver, and other metals
• Timber grown on your home property or investment property, even if you make casual sales of the timber

Short Term Capital Gains Tax vs Long Term Capital Gains Tax

SHORT TERM GAINS TAX: If you hold a capital asset for less than one year, you will pay regular income tax on the gain. Your High-Net-Worth/Ultra-High-Net-Worth (HNW/UHNW) clients might easily be in the maximum income tax bracket of 37%, so they could pay that percentage on short-term capital gains. You need to consider this before selling.

LONG TERM GAINS TAX: If you hold a capital asset for more than one year, then sell it for a gain. Your clients will pay 0%, 15%, or 20% on the gain depending on their filing status and income. The specifics are in the chart below.

Capital Losses Can Offset Capital Gains

If you have capital losses, you can offset those dollars for dollars against your gains and deduct additional losses up to $3,000 a year. If your capital loss is greater than $3,000, you can carry forward the loss to future tax years.

How are Gifts to Children, Grandchildren, and Others Taxed?

The gift tax exclusion is $15,000, which means you can give anyone you want $15,000 a year, and no one pays gift tax. For minor children or grandchildren, you put the money in a Uniform Gift to Minors Account (UGMA). If you invest wisely, this money can quickly add up, and suddenly your minor grandchildren, for example, are receiving income and dividends from investments you made in their accounts. Do they have to pay taxes? Yes, they do. 

The Kiddie Tax

This can bedevil taxpayers, so you need to know how it works. The first $1,100 of income to a child in a UGMA is exempt from tax. The second $1,100 is taxed at the child’s income tax rate, which will be lower than that of their parents. All income from above $2,200 is taxed at the income tax rate being paid by the parents.

The Age and College Exception When Claimed As a Dependent

When the child reaches the age of majority in his state, he must change the name of the UGMA account into his name because the money now belongs to him. He must also file his own 1040. However, he must pay the income tax rate of his parents on his unearned income from the account if he meets the following three criteria established by the IRS.

• He is between the ages of eighteen and twenty-four.
• He is attending college.
• He is claimed as a dependent on the tax return filed by his parents. No exceptions.

I encourage you to be familiar with these numbers because people will often ask you questions about the situations outlined above. You are a financial professional, and if you want to come across as one, you need some familiarity with the different accounts I have discussed and how they are taxed.

Resources:

[1]  www.irs.gov/publications/p544#en_US_2019

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Contributing Writer: Subject Matter Expert Charles McCain