Investment Income Alternatives for the Elderly

There is an assortment of tax breaks that are available to investors. 

The elderly investor who is heavily dependent on social security benefits often makes investment decisions that result in un-necessary taxes. As a general rule, the best tax posture is to accumulate income in tax deferred investments or investment structures as long as possible and to cash in other investments on which there is a minimum of capital gains.

Where there are some investment losses, they can be used to offset capital gains that would otherwise be taxable.

Certain kinds of income that are derived from the use of capital are income tax free. One example is tax free municipal bonds. Another is cash value in a life insurance policy. A third is the tax free gain of up to $250,000 per taxpayer  on the sale of a residence.  

Other investments offer long term tax deferral with the benefit of being able to reinvest the income without immediate tax. Examples include an assortment of retirement savings plans, deferred annuity contracts and U.S. savings bonds. Investments held by a charitable trust are also tax deferred until the income is distributed to the beneficiary. If the stock in a closely held corporation is sold to an employee stock ownership plan, the proceeds may be reinvested by the owner of the business in an assortment of other domestic stocks and bonds on a tax deferred basis. Certain kinds of assets may be eligible for a tax deferred exchange, while others may be eligible for the tax deferred installment sale treatment. 

Some investments offer the potential for tax favored treatment of any gain. Long term capital gains are subject to a maximum tax rate of 15% (28% for certain kinds of "collectibles"). For taxpayers in the 15% income tax bracket, the maximum tax rate on long term gains is 5%. Numerous kinds of investments such as growth oriented common stocks, land and other tangible assets are eligible for the lower rate on capital gains if they are held for more than one year. 

When investments are gifted to lower tax bracket family members, the recipient takes over the tax attributes of the donor. If a stock is appreciated and has been held for more than a year, it would be eligible for the 15% maximum tax rate on capital gains. But -- but giving the stock to a lower bracket parent, the parent may be eligible for a 5% maximum tax rate on the same stock.

ElderTax Index