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Living Tax Free:
The tax code encourages home ownership in many ways. Perhaps the greatest of these tax incentives is found in Section 121 of the Internal Revenue Code. An individual is allowed to exclude up to $250,000 (or $500,000 if married filing jointly) of a gain realized on the sale or exchange of a personal residence. This tax-free gain exclusion is allowed so long as the individual (or couple) uses the home as the primary residence and has owned the home for a period totaling at least two years out of the last five years ending on the date of sale.
Buy & Hold:
Timing the sale of certain assets can have a significant effect on total taxes owed. Assets such as real estate or stocks that are held for more than one year receive favorable tax treatment in the form of a lower long-term capital gain tax rate. Furthermore, if a certain asset is being held at a loss, timing the sale of this loss transaction with a gain transaction can provide tax efficient results.
Annual Gifting:
The tax code allows for tax free annual gifts up to a certain amount per person per year. For 2011, an individual can gift up to $13,000 per person to any number of recipients in a calendar year without paying federal gift tax.
Roth IRA in an Estate:
In addition to its income tax benefits, a Roth IRA can help with estate tax planning depending on the nature and size of an individual?s retirement accounts and the size of the estate. In particular, the conversion of a traditional IRA to a Roth IRA before death can ultimately reduce any estate tax that would be due after death.
Life Insurance Ownership:
While life insurance proceeds are generally income tax free, the proceeds may or may not be estate tax free depending on who owns the life insurance policy and the size of the insured?s estate. Estate tax savings can be significant if life insurance ownership is properly designated.
Like-kind Exchanges:
Section 1031 of the Internal Revenue Code allows for like-kind exchanges, which can be a powerful tax deferral technique especially with real estate investments. So long as the Section 1031 requirements are met, an individual can continually postpone taxes on gain transactions by making like-kind exchanges.
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