What's Next: Tax Secrets Of The Rich

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Column for What’s Next website TAX SECRETS OF THE RICH By Mark Levine Hemingway was wrong when he wrote the only difference between the rich and the rest of us was they have more money. They also have better accountants who come up with unique ways—some iniquitous, but all ingenious—to avoid taxes. Be forewarned: None of the tax secrets of the rich are for the faint of heart or feeble of wallet. And two of them, to be blunt, don’t pass the smell test. Charitable remainder trusts: Say you jumped on AOL early and now have a block of stocks that is now worth $100,000. What can you do to avoid taking a huge tax hit? Have your lawyer establish a charitable remainder trust, and then give the block of stocks to the trust. Instruct the trust to sell the stocks for $100,000, invest the cash, and pay you an income of, say, eight percent for life. You will have avoided capital gains taxes and as a result will be earning interest on a larger principal. Designate a charity to receive the trust’s remaining principal if you die and you’re also eligible for an immediate tax deduction (and probably an immediate testimonial dinner). If you’re so inclined, you can use the money you save through that tax deduction to buy a second to die life insurance policy which will pay your kids the money they would have inherited if you didn’t give the asset to charity. Donating appreciated stock: Another way to avoid taxes and look like a philanthropist in the process is to donate appreciated stock to a charity rather than selling it. Not only will you avoid paying capital gains taxes, but you’ll receive a tax deduction based on the pretax value of the donation. As the Bible says, charity never faileth. Deemed sales of stock: Any stock acquired after January 2, 2001, and held for more than five years, will now be subject to 18 percent capital gains tax rather than 20 percent. On your 2001 tax return you can elect to make a “deemed sale” of stock as of January 2, 2000, in order to qualify for the reduced rate. Say you own a block of stock for which you paid $10,000. You can elect to “deem” that you sold the stock on January 2, 2000. If you have had no gain at that point, any appreciation from then on will be taxed at the lower rate. You’ve saved yourself two interest points through a bookkeeping maneuver. If you have had a gain at that point you’ll be required to pay 28 percent on the appreciation up to January 2, 2000, but then only 18 percent on subsequent appreciation. Using stock as currency: The IRS doesn’t require taxpayers to automatically report the transfer of stocks. That loophole is being used by some to facilitate barter transactions. Say you own a block of stock you bought for $1,000 which is now worth $20,000. If you sold the stock and realized the gain you’d be responsible for paying taxes on it. But what if you transferred the stock to your child’s private school in lieu of paying the $20,000 tuition bill? Some “aggressive” tax advisors posit that there hasn’t actually been a taxable exchange since you haven’t gotten anything back for the transfer. The scuttlebutt is some educational institutions are going along with this little charade. Even so, this plot smells worse than that private school’s locker room. Real estate swaps: If you and your friend simply swapped similar pieces of property—say one suburban home for another—neither of you would be responsible for paying sales tax or capital gains tax since there wasn’t actually a sale. Say you bought a beach house on the New Jersey shore for $500,000. Now it’s worth $750,000, you want to sell it and buy a ski chalet in Vermont, but you don’t want to pay taxes. You could look for a friend to swap with, but the chances of finding the perfect partner are slim. Instead you hire a middle man. Put your beach house up for sale and look for a ski chalet. Having come to terms with both a buyer for the beach house and the owner of a ski chalet, sell your beach house to the intermediary. He sells it to the buyer and uses the proceeds to buy the ski house. If he buys and sells for the same amount there’s no tax due. If you end up with any profit it’s called a “boot” and you’re liable for taxes only on that amount.


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