How Low Interest Rates Can Cut Your Tax Bill

Alexander HamiltonI often point out tax-saving opportunities created by our current low interest rates, and an October 1, 2011 Wall Street Journal article does a nice job of making the point again. In How Low Rates Can Cut Your Tax Bill,  Tax Report columnist Laura Saunders points out that our current low interest rates (a Section 7520 rate of only 1.6% in December 2011) add to the attractiveness of several mainstream planning opportunities:

  • Loans to family members – the applicable federal rate for long-term loans (more than 9 years) is only 2.80% in December 2011. The author gives an example of a $100,000 loan from parents to a child and his spouse to buy a home: the parents could either collect annual interest of $2,950 or they could forgive the loan (up to $52,000 of debt forgiveness per year with no gift tax liability) in whole or in part.
  • Installment Sales — with interest rates low, more of a sale counts as capital gain than as ordinary interest income.
  • Grantor-Retained Annuity Trusts — noting that we have seen proposals from money-hungry Congressmen to eliminate short-term GRATs, the author urges consideration of a strategy “sanctioned by the tax code” while rates remain low;
  • Charitable Lead Trusts — Charitable lead trusts (in which a charity uses trust assets for a term of years to create income, and then returns them to your children or grandchildren) are likely to pass more tax-free assets to beneficiaries when interest rates and asset values are low. Given historically low interest rates and low asset values, lifetime CLTs, which can create income tax deductions now and save estate taxes later, are worth considering if you are charitably inclined.

Check out the article, and then contact me if you’d like to talk about any of these strategies in more detail. Remember, nobody knows how long interest rates will stay this low. They could rise tomorrow, so if you’ve been thinking along these lines, it’s time to get moving.