If you’re holding highly appreciated investments, there may be techniques you can use to avoid federal income taxes on the gain. High-income earners pay tax on long-term capital gains at rates of 15% or 20%, plus an additional 3.8% net investment income tax (NIIT), if applicable. But lower-income earners enjoy tax-free capital gains. Currently, capital gains are taxed at 0% for federal income tax purposes until taxable income reaches $38,600 for individuals or $77,200 for joint filers.

One strategy is to give appreciated investments to lower-income parents, children or other family members. Keep in mind, however, that the “kiddie tax” essentially erases the benefits of this strategy if you transfer investments to a dependent child under the age of 19 (age 24 for a full-time student).

Another strategy is to sell appreciated investments during low-income tax years, such as years in which you or your spouse is unemployed or between jobs, or years after you retire but before you turn age 70½ (when required minimum distributions from retirement accounts begin).

Time to revisit the research credit

The Tax Cuts and Jobs Act (TCJA) expands the federal research credit (often referred to as the “research and development,” “R&D” or “research and experimentation” credit) to a greater number of businesses. The TCJA didn’t modify the credit directly, but it eliminated the corporate alternative minimum tax (AMT) and temporarily increased the exemption amounts and phaseout thresholds for individual AMT, making the credit available to many corporations and pass-through entities for the first time.

Does your estate plan have a formula clause?

If your estate plan contains a “formula-funding clause,” consider revising it to avoid unintended consequences. These clauses typically fund a credit shelter, or “bypass,” trust with the greatest amount that can pass free of federal estate tax, with the excess going to your surviving spouse or a marital trust. The Tax Cuts and Jobs Act increased the gift and estate tax exemption to $11.18 million through 2025, so if your estate is less than that amount a formula clause will funnel all of your wealth into the bypass trust. Depending on the language of the bypass trust, you may inadvertently be essentially disinheriting your spouse. Funding the bypass trust can also trigger a substantial state estate tax bill, if you live in a state with an estate tax.

To avoid this result, use funding provisions designed to minimize both federal and state estate taxes while still achieving your wealth distribution goals. They should be flexible enough to ensure that your trusts are funded properly regardless of future changes in exemption levels.

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