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Comment by hirako2000 | Hacker News Reader

hirako2000

I'm not sure to understand how deferring taxes is a better deal than paying it here and now.

Since I'm not a financial adviser, someone asked me take on which 4k projector to buy last Xmas.

I explained that the tech has improved so much lately, they've become somewhat affordable, I recommended a model and pointed ou that he would certainly get a better device next Xmas, for half the price. I thought he would follow suit given his budget was a bit below the retail price. That would just wait.

His response was he would rather go ahead and up the budget a few hundred dollars to get it right away. That projectors will surely get much better by next year, but that he, certainly, will not.

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Deferring taxes is essentially an interest-free loan from the government to you. You can take that money, invest it, and then keep most of the earnings when you eventually pay the taxes.

There are also some loopholes where capital gains taxes deferred until after death just don't get paid at all. This is the "step-up basis" where your inheritors get to reset the basis of capital assets and neither you nor they has to pay taxes on the capital gain.

This is what they call "buy borrow die" or some such. Buy an asset, borrow against it, die to reset the basis. Your estate will still have to repay the loans, but... that one part I don't really understand. Do they just refinance, taking a new loan against the newly valued asset?

This all seems to benefit from low interest rates. Was it a thing in the 90's? Or even the 80s when rates were much higher?

It's a strategy that's only really available to the ultra wealthy, because the banks are willing to give them a bespoke loan with a much lower interest rate that's payable after they die. There's also a complex trust setup to pass the asset to their heirs.

These laws are the way they are so that if a kid has their parents die they aren't facing an immediate giant tax bill on cap gains. It applies to basically anyone inheriting even a normal house. The difference in cost basis could be 90% of the value.

You only pay cap gains if you realize gains, so you would only face a huge tax bill if you had a pile of cash dumped on you. E.g if you inherit a $1M house and sell it, and the IRS thinks you own 20% taxes on $900,000 of gains, then you have $1M of cash on hand to pay $180K in taxes.

(Also, if you live in the house for 2 years and then sell it, you can exclude $250K-$500K in gains, but that has nothing to do with inheritance).

It would depend... elsewhere on thread, someone says Canada treats death as disposition, and capital gains tax is due for a transfer on death.

Family farms are the sympathetic example of choice. Let's say your parent's family farm, that they started from nothing in the 1950s is now worth $20M. If you have to sell it to pay the taxes, because the estate doesn't have $4M to pay capital gains tax, plus $2M for estate taxes, then another family farm goes corporate.

Maybe you can inherit the capital property at the original owner's basis... then you'd only owe the cap gains tax if you sold it, and you'd have money to pay it because you sold it. That could work... although one nice thing about the step-up in basis on death is that nobody has to dig through to find the old records to establish basis when there's a clearly established death instead.

Its not like there can't be exceptions or carveouts. Its disastrous to treat that as representative of every dynastic transfer of accumulated wealth

Yes, and when you do pay it's a lower "real" tax (due to inflation)

If I have X dollars and get taxed such that I have X * T after the taxing, say T = (1 - .20), then I invest and that money grows by a factor, say G = (1 + .50), over the years, then in the mean time inflation hits and reduces my money by a factor, say I = (1 - .10), so that what I end up with in the end is F = X * G * T * I. If instead I invested and grew and inflated and then got taxed, X * G * I * T, it would be exactly the same. Multiplication is commutative.

What you are doing by delaying taxes is hoping you have a lower rate later. Say you make less in retirement or die untaxed and your kids get a step up in basis. But without a change in rate (which might go up even), there’s no difference.

If you take a loan against your larger capital pool, inflation helps you (to the extent it wasn't incorporated in higher lending costs).

But yeah that's a second order effect. There aren't really any scenarios where you have a fixed nominal tax that can be deferred without locking up the money, so I think you're mostly right that it comes back to lower tax rate and step-up.

Good point about inflation. Deferring can make sense. I was thinking what we earn today is more enjoyable to spend today than when we have bad knees and whatnot.

This is touched on briefly, the number one reason is that if you can keep deferring your taxes indefinitely then you never have to pay them. Your tax burden is wiped away on death so not only does it not matter to you but your heirs won't be affected either.

Suppose I defer $1 million in taxes until after I'm dead, and my estate conveniently does not have $1 million in assets left. What happens?

In the meantime, I gave all the assets to my children while I was alive

The answer is nothing. The government eats the loss.

The government looks at your transactions as designed to produce that outcome and claws back the money from your children.

Your heirs owe neither your debts nor your taxes

Transactions designed to fraudulently hide assets can be reversed. Otherwise you could gift all your assets to your brother then declare bankruptcy.

What loss? It was never the state's money to begin with.

Because of cost basis step up at death, you can just defer forever.

Not sure I understand your example. If you always wait for the new version of a product to release the following year then you are never going to buy anything.

but you'd wait only long enough for a version that's good enough, not forever.

In addition to the other reasons given: Sometimes it also makes sense if your income is lumpy and you e.g. expect to have years where your income will fall into a lower tax band. It then can pay to suddenly recognise more income to take out as much as you can within the lower band.

The projector prices are a scam except for Christie and Barco

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