For high-income earners, long-term capital gains are taxed at rates as high as 23.8% (20% for those in the top tax bracket, plus a 3.8% tax on net investment income). The long-term capital gains rate for taxpayers in the 10% and 15% brackets is 0%. One strategy for taking advantage of tax-free capital gains is to transfer capital assets to your children or other family members in the two lowest brackets. For 2015, that means projected taxable income up to $37,450 ($74,900 for joint filers).
Before you try this technique, consider any potential gift tax consequences. And keep in mind that the 0% rate applies only to the extent that capital gains “fill up” the gap between the taxpayer’s other taxable income and the top end of the 15% bracket. Once that level is reached, additional capital gains are taxed at 15%.
This strategy won’t be effective if you transfer assets to a dependent child under the age of 19 (24 for a full-time student). Why? The “kiddie tax” will apply your marginal income tax rate to the child’s unearned income (including capital gains) to the extent it exceeds $2,000.
Don’t overlook the IC-DISC
If your business exports American-made goods or performs architectural or engineering services for foreign construction projects, an interest-charge domestic international sales corporation (IC-DISC) can help slash your tax bill.
An IC-DISC is a “paper” corporation you set up to receive commissions on export sales, up to the greater of 50% of net income or 4% of gross receipts from qualified exports. Your business deducts the commission payments, while distributions received from the IC-DISC are treated as qualified dividends, not capital gains.
Essentially, an IC-DISC allows you to convert ordinary income taxed at rates as high as 39.6% into dividends taxed at 15% or 20%. An IC-DISC also allows you to defer taxes on up to $10 million in commissions held by the IC-DISC by paying a modest interest charge to the IRS.
Manufacturers’ deduction for retailers?
The manufacturers’ deduction allows eligible businesses to deduct up to 9% of their net income from “qualified production activities.” Although this typically means manufacturing, other types of activities also may be eligible.
In a 2014 legal memorandum, the IRS confirmed that retailers may claim the deduction for certain cooperative advertising payments received from vendors in connection with the retailer’s printed flyers. If your business uses cooperative advertising agreements, see if you’re eligible for the deduction.