Steven A. Branson, Esq. – Tax Strategies, Tax Prep & Audits, Estate Planning, and More…
Category Archives: Estate Planning
Estate planning involves documents to direct where your assets go at death, your wills and trusts, documents for your care now, your durable power of attorney and medical directive or health care proxy, and life insurance, the proceeds of which replace your earning power.
With the federal gift and estate tax exemption nearing $13 million, a married couple can have close to $26 million in their estates before any federal estate tax would be due. That leaves only a small percentage of people in the US who actually need estate plans focused on avoiding estate taxes. Those who are comfortably below the threshold can instead focus their plans on reducing income taxes.
Estates get a step up in basis at death, so that assets do not pay both estate and income taxes. For example, the house owned by a couple often has a low basis, so taxes will be due on sale. When they die, they get a step up in basis, eliminating that gain and the corresponding income tax that would be due at death.
To illustrate, here’s an example: a married couple own a house worth $2 million for which they paid $500,000, they have $2 million in retirement accounts and $5 million in broker accounts. Their combined estate of $9 million is well below the federal exemption of nearly $13 million per person, so no federal estate taxes will be due. They have $1.5 million of gain if they sell the house, of which $1 million would be taxed after applying the $500,000 exclusion on the sale of a principal residence.
If they have the standard estate plan, they will have revocable trusts that use the state and federal estate tax credits at both the first and second deaths. If proper elections are made, no estate taxes will be due at the first death and no federal estate taxes at the second death. They will also get the step up in basis.
But what if one spouse dies many years later? The half with the step up at the earlier death could now be subject to taxes on gain when the heirs direct the estate or trusts to sell. If the house is then worth $4 million, the half in the trust of the first to die has new gain of $1 million on which income taxes will be due.
If instead of having half the house counted at the first death, what if it is treated as passing to the survivor? Then there is a full step up at the second death, with no gain. And they have not traded capital gains for estate taxes. While assets are counted in the second estate, rather than using the exemption at the first death, the first estate can make proper use of the deceased spouse’s unused exemption or “DSUE.” Since 2012, federal law allows any portion of the gift and estate tax credit not used in the first estate tax filing to be carried to the second spouse’s death or “ported,” if the proper election is made. This “portability election” for the DSUE is made on the estate tax return.
But what happens when the federal credit drops back down in 2026 to the old amount as scheduled, which, after adjusting for inflation, is expected to be around $7 million? The estates for the couple in our example still avoid federal estate taxes, using the DSUE of up to $7 million from the first death and the $7 million credit at the second death.
Planning for state estate taxes may be necessary (for Massachusetts residents, the trusts can be used to shelter $1 million, the maximum credit). And you may want to use trusts to control who gets access to the estates and when. Also, you may need to plan for the generation skipping transfer tax or “GST” tax, which requires use of trusts and proper elections at death.
If your net worth is enough to need estate planning but you do not expect to owe federal estate taxes, then your plan can address avoiding capital gains and use the DSUE to ensure that estate taxes are still avoided.
We are told to act before year end because it is our last chance to have an impact on our 2022 taxes. Planning throughout the year could be even better, if you recognize when to act, but most of us are pulled in so many directions that it is hard to organize and act until there is an external pressure, such as the looming end to the calendar year. So, when you are ready to take stock of your situation, you can make the planning effort even more productive by reviewing your investments, estate plan, and finances, not just your taxes – consider it a “financial checkup.”
This year, there are changes that occurred due to inflation as well as legislation. While we had expected tax increases, none materialized (there may still be tax law changes, but legislation such as the “SECURE Act 2.0,” child credit and tax extenders all remain in flux). We review the changes that did occur before turning to actual year-end tax planning strategies.
Impact of inflation
Is there ever a good side to inflation? Perhaps the IRS adjustments to several tax-related thresholds that change for 2023 count, such as these:
The standard deduction MFJ $27,700 up from $25,900
The gift and estate tax credit $12.92 million from just over $12 million
The annual gift tax exclusion $17,000 up from $16,000
401(k) maximum contribution $22,500 plus $7,500 (for over 50)
IRA max. $6,500 plus $1,000
SEP-IRA max. $66,000
The tax brackets at which rates increase have also gone up, so more is taxed at lower the brackets.
Inflation Reduction Act
The Inflation Reduction Act passed this summer and included changes to tax laws regarding energy saving credits. The Act also contained other provisions, such as the 15% AMT for C corporations and 1% stock buyback tax. It’s unfortunate that the abbreviation for the act is IRA, as we already have that in our tax lexicon.
Beginning in 2023, this new law changes conditions for obtaining the $7,500 credit for new electric vehicles (EVs) and adds a $4,000 credit for used EVs (EVs that are 2 or more years old). The Act also expanded the reporting requirements for the credits on your tax returns. Finally, EV buyers can monetize the credit at purchase to reduce the sale price, rather than wait for their tax filing. Remember there is also a credit for installing a home charger.
To obtain a credit for new EVs, the battery’s minerals must be extracted or processed in the US or a free-trade partner. The battery must also be manufactured or assembled in North America. Final assembly of the EV must be in North America. There are price ceilings on EVs and income limits on claiming taxpayers.
The Act extend and expanded home energy credits but also expanded the reporting requirements.
Start with this goal: to lessen the total tax due in 2022 and 2023 combined. Usually that means delaying income to 2023 and accelerating deductions to 2022. For 2022-2023, the jump in the standard deduction could mean losing itemized deductions in 2023, so pay special attention to what you can shift to 2022. As we pointed out our post for 2021 year-end planning, if you are concerned about future tax rate increases, you can use a Roth Conversions to bring future income into 2022.
Now to the planning: Can you act at all?
Each year, we advise that you be practical, focusing on where you can actually make moves. For many, the high standard deduction (which is even more for over age 65 taxpayers) means you will not itemize (i.e., your total for itemized deductions is less than the standard amount so you take the higher standard deduction). And, if you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year. If you can itemize, you have more tools for planning.
Tools – income
You can reduce taxable income by maximizing your retirement contributions with your employer via 401(k) or 403(b) plans and IRA contributions if you are below the thresholds. If you are self-employed, you can contribute to your own qualified plan such as a SEP-IRA.
You may also be able to contribute to a health savings or flex account. Be sure to see to use any flex account balances before they expire.
Review your investments to see if you can take losses to reduce capital gains and up to $3,000 of ordinary income. ax loss harvesting reduces net taxable capital gains, but be sure not to run afoul of the wash-sale rule.
Tools – deductions
Review your unreimbursed medical expenses, which you can deduct if the total is over 7.5% of your adjusted gross income.
State and local taxes are capped at $10,000, so you may not be able to shift much between years. And it is difficult to accelerate mortgage interest on first and second homes.
Often, the place for the most change is in charitable deductions, where you can bunch two- or three-years’ worth into a single year so you can itemize. You can use a donor advised fund (“DAF”) to bunch, by contributing all in one year, then having the DAF send annual amounts. Also, you can transfer up to $100,000 from a traditional IRA directly to charity if you are over 70½. Note that Congress has not extended the $300 above the line charitable deduction.
Before you finish, check withholdings and estimates paid
Especially if you increase income in 2022, review your total paid to the IRS and state via withholdings and estimates make sure that you meet the safe harbor rules. If not, you could owe interest for under-withholding.
And remember your estate plan review
As noted above, the federal gift and estate tax credit is close to $12 million for 2022 and increases to $12.92 million in 2023. If you have excess wealth, you may want to gift while you can, especially if you want to use certain trusts, like a GRAT or QPRT. For more on estate planning updates, see our estate planning checkup post.
If you do review your estate plan documents, also review beneficiary designations and asset ownership to make sure everything is current and flows correctly.
As you review your 2022-2023 tax planning, determine what you can shift and project the impact. Then follow through on the details.
Let us know if you have any questions.
Good luck and best wishes for happy and healthy holidays!
We have written previously stressing the need to have an estate plan, so you do not leave a mess, and why you may need life insurance to protect others. Few people will disagree with the need to have a current plan and to provide for survivors, but not everyone acts.
Avoidance. Feelings of self-doubt, fear of pain or anxiety around the task, depression, fear of asking for help, lack of trust.
Perfectionism. Fear of failure, fear of being criticized (both externally by others and – often more powerfully – internally by parts of yourself).
Ambiguity. Lack of clarity about the task, feeling overwhelmed, difficulty prioritizing in the absence of a crises, being focused on immediate tasks.
Narcissism. Over-confidence in getting it done at the last minute. Needing chaos or pressure to provide adrenaline, the ability to focus to the exclusion of everything else, and a feeling of being fully alive.
Physical Issues. Fatigue, illness.
Lack of knowledge. Not knowing what you don’t know, unsure how to get needed help and information.
Financial. Not having the funds to take the necessary action.
Do any of these apply to you? If so, we can help so please contact us.
Why you should:
One reason to review your estate plan is that the Biden administration may seek changes to the estate and income tax laws; you want to make sure your documents have the flexibility to address these changes. The current federal gift and estate tax credit is close to $12 million. However, it is scheduled to drop to between $5.5 and $6 million in 2025 and the administration may push for a lower credit to be imposed sooner. Also, the administration may try to eliminate the step-up in basis at death. We will continue to monitor any proposed law changes and post updates.
There are other tax law changes to address, such as the elimination of the “stretch IRA.” You may need to revise your beneficiaries. Also, you will want your executor or personal representative to elect portability of your federal credit to minimize taxes and may want your documents to address the generation skipping transfer tax credit.
Another reason to act is to provide for your digital assets, something old documents may not address. For example, you can give your attorney-in-fact under your durable power of attorney access to your digital assets and you can assign your digital assets to your revocable trust so your trustee has access. Digital assets include e-mail and text messages, photographs, videos and other files on your computer, on-line accounts such as your investments and social media, or even intellectual property and patent rights. You may also have collectibles that need to be addressed,
Another reason to act is to ensure that someone knows how to access all your passwords if something happens to you. Create your own “Rosetta Stone,” a document telling them how to access your digital life, with IDs and passwords, and then make sure an immediate family member or close friend knows where to find it. This way, they can locate all your important documents, find assets and insurance, and handle your social media if something happens. You may also want to provide a memorandum to your personal representatives and trustees detailing your wishes, including thoughts on when to distribute to children, protecting from creditors, and even burial or cremation.
If you to take the time now to review and update your plan, be sure:
that you have documents that are in order,
that the documents are correctly executed,
that you provided adequate resources for survivors, including life insurance, and
that your beneficiary designations and asset ownership all coordinate with your documents.
When you do, you will have improved matters for you and your family!
Contact our office if you have any questions or comments. And be well!
We face a challenging time for planning: The election resulted in a new President while the rate of Covid-19 infections (and deaths) continues to rise. This has affected the economy, resulted in some tax law changes and may yield more stimulus to restore the economy. Also, there may be more changes in 2021. This post is intended to help you make the best tax-efficient moves before 2021 begins.
2020 year-end tax planning – update on using the tax laws to save you money
In 2018, we provided a three-part series explaining the impact of the new tax law. In our first part, we discussed the impact of the new law on personal taxes and in our second part, we discussed planning for small businesses. This update replaces the third part from December 2018, as updated December in 2019 – it is our guide for year-end moves to reduce total taxes between 2020 and 2021. But, before getting to the planning steps, we address the uncertainty caused by possible tax changes in 2021 and review some recent changes from earlier this year.
Possible Tax Law Changes under Biden
President-Elect Biden campaigned on raising taxes for corporations and for individuals making over $400,000 of income. However, even if the Senate seats in Georgia go to Democrats in January, the lack of a “Blue Wave,” a sweeping Democratic mandate, means that the tax hikes are unlikely to pass. Furthermore, the President-Elect has made clear that controlling Covid-19 and economic recovery are the top priorities of his new administration.
What did President-Elect Biden propose? He would restore the 39.6% bracket for couples making $622,050 or more ($518,400 for singles), add a 12.4% social security tax for income over $400,000, place a 28% limit on itemized deductions for high income taxpayers, restore the 20% long-term capital gains rate for high income returns (and even apply ordinary rates on gains of taxpayers over $1 million), and limit the Qualified Business Income Deduction and opportunity zone credits. For estate taxes, he would reduce the current $11.58 million exemption to a lower amount, perhaps $5 million or even $3.5 million, and eliminate the step-up in basis at death.
While none of these changes are likely, there may be narrow tax hikes to fund infrastructure building and small tax breaks for lower earners (child/dependent care and elderly long-term care credits). There may also be more stimulus action, such as more Paycheck Protection Program loans and business tax breaks for worker safety measures, as well as retirement savings incentives, tax extenders for items expiring this year, and tax breaks to encourage US manufacturing. We will monitor activity on these matters for comment in future posts.
Changes from the SECURE and CARES Acts for 2020
We wrote about the CARES act earlier this year, which waived the 10% penalty for coronavirus-related distributions from qualified plans of up to $100,000, with three years to pay the taxes due or redeposit as a roll-over, and suspension of required minimum distributions (“RMDs”). The act also allows larger plan loans.
The Secure Act delayed RMDs to age 72 and allowed individuals to contribute to IRAs after age 70 ½ if still working. But the Act also limited the distribution of IRAs to a 10-year maximum for beneficiaries other than spouses and certain others, thus eliminating the “stretch IRA.”
The Families First Act created credits for people unable to work due to Covid-19 illness and due to caring for others. If you are affected, check to see if you are eligible for any of these tax credits.
A reminder on the mortgage interest deductions
As you may recall, mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase your primary and secondary residences. Interest on home equity loans is not deductible, except when the home equity indebtedness is used to purchase or improve your primary or secondary residence.
Check taxes already paid
Make sure your total paid to the IRS and state via withholdings and estimates meets the safe harbor rules. If not, you could owe interest for under-withholding.
Now to the planning: Can you act at all?
Each year, we advise that you be practical, focusing on where you can actually make moves. For many, the $24,800 standard deduction for married couples (more for over 65 taxpayers, and $12,400 for single taxpayers) means you will not itemize (i.e., your total for itemized deductions is less than the standard amount so you take the higher standard deduction). And, if you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year (but you can also stop collecting receipts for those deductions).
There is one exception from the CARES Act, which provides a $300 above the line charitable deduction for cash contributions. You get this regardless of itemizing.
Some possible deduction strategies
One technique for getting around the limit on deductions is to bunch certain deductions from two or more years into one year. However, the only deduction that you can easily move is for charitable donations, because your state, local and real estate taxes are limited to a $10,000 maximum and you cannot accelerate, or delay, significant amounts of mortgage interest.
If you do not want any one charity to receive the full amount in one year, you can still use this bunching strategy to donate to a donor advised fund, from which you may be able to designate donations to particular charities in future years.
The tax planning steps
What can you move? If you are able to itemize, determine what income and deductions you can move from 2020 to 2021 or vice versa. You want to minimize total taxes for both years. Make sure your planning includes the 3.8% Medicare tax on high income and a review Roth conversion. Roth distributions are not taxed, so converting a traditional or roll-over IRA to a Roth could be beneficial, as long as the tax cost now is not too great – see more at Roth or not to Roth? With the waiver of the 10% penalty for early withdrawals, a Roth conversion may be more attractive. Business owners will want to review our post on planning under 199A for QBID.
What is the effect of moving? Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.
The AMT – Finally, watch for the Alternative Minimum Tax (“AMT”). The AMT affects fewer people, but it is still wise to review so you avoid it.
If you have not maxed-out your 401(k) plan, IRA, Health Savings Account or flex plan account, consider doing so before the end of the year. The contributions reduce your tax able income while adding to savings. But check out our post on paying debts vs. investing.
If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS-approved charity and having none of the distribution taxed. The provision was great when you had an RMD to satisfy, but that was suspended for 2020. That should not stop you if you still have the charitable intent.
The deduction of unreimbursed business expenses was terminated by the new tax law. That hurts many who are working from home this year, as they cannot deduct associated costs.
We wrote about forming an LLC or S Corp. to report business expenses or taking expenses on Schedule C in our 2018 Part III post, but that applies to expenses for that business and we stressed that you will need a valid business purpose to form the LLC or S Corp. or use Schedule C for self-employment and take expenses. Be sure to consult with an attorney before trying any of these ideas.
Review your unrealized losses to see if you can “harvest” those losses to offset or “shelter” realized gains, reducing your total taxable income. If you have more losses than gains, you can take up to $3,000 of capital losses against other income.
If you sell an asset that you would prefer to retain, in order to shelter gains in 2020, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait 30 days or purchase a similar asset that fits your portfolio while not counting against the wash sale rule). N.B. – when buying mutual funds late in the year, check for distribution dates so you do not purchase just before dividend and capital gains distributions, as you will owe taxes on those distributions.
If you have significant unrealized gains, consider using appreciated stock for charitable donations – that way you avoid the tax on the gain while still getting the full fair market value for your charitable donation. That is very effective tax leverage!
Estate plan review
While you review your taxes, review your estate plan as well. The federal exemption is over $11 million in 2020, so fewer people will owe any federal estate tax. However, that may change in 2021; also, many states still impose estate taxes on smaller estates.
The individual gift and estate tax exemption is due to return to $5 million, adjusted for inflation, in 2026 and could be lowered sooner, as noted above. That tax rate could also go up.
If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year now. If your spouse joins you, that is $30,000 per person. This includes funding a 529 plan for education cost – expanded to provide for more than just college – or an ABLE account for disabled dependents. Note, however, that holding appreciated assets for the step up in basis at death may be better than gifting, but this could be eliminated as noted above.
If you do review your estate plan documents, also review beneficiary designations to make sure everything is current. And review your medical directive and durable power of attorney.
Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2020 and 2021.
Good luck and best wishes for happy and healthy holidays!
Estate planning is not fun. You have to face what the world will be like
after you leave it. You want to leave a
legacy so your survivors are happy. However,
less than one in five of you have taken the steps needed.
If you completely ignore creating
a post-death plan, then you will leave a chaos and confusion for others to sort
out at a time when they will be grieving from your loss. They will have to find where you put
everything and sort out where you wanted everything to go.
If people depend on you
financially, not providing enough on which they can survive will mean major
lifestyle changes for them. Not
something you want.
You want survivors to focus on
cherished memories, not on probate courts.
Now, what do you do?
First, leave enough so survivors can survive
Make sure you have provided for
those who depend on you. Usually, that
means purchasing some form of life insurance.
You want to replace your earning power from now until the time that they
are independent, either when a spouse or partner retires or when your children
become gainfully employed.
If you have been saving for
retirement, those accounts may be enough so you don’t need to purchase life
insurance. Reviewing your potential
estate with an advisor is wise to make sure survivors have enough.
Second, sign the documents
Execute documents that ensure that your estate goes to the people who you want to benefit. This usually means signing beneficiary designations for retirement plan accounts and executing a will. You may even need a trust for young survivors. We wrote this post detailing the steps a few years back. If that’s too technical, ask me questions.
You may want to consult an advisor to get all the proper documents in place. Here is a good checklist to review.
Third, have the conversations
Talk to your spouse, to your
adult children and to the people you name in your documents. Make sure they understand your wishes. Do you want to be buried or do you want to be
cremated? Do you want donations made to
What if you have a catastrophe
the doesn’t kill you, but leaves you hooked up to machines forever? Have a conversation so your loved ones know
your wishes. And, make sure you sign a
health care proxy or medical directive, living will and even a “do not
resuscitate” or DNR order.
Fourth, leave a trail
Make sure the key people know how
to find everything. One way is to write
a memorandum listing your passwords, where to find the safe deposit box key,
and where you stored the life insurance policies. Give copes to key people, such as the
personal representative named in you will or the trustee of your trust.
Finally, leave a legacy
When you take care of all you
can, in advance, your survivors don’t have to suppress feelings while they
clean up a mess:
“WE WERE WORRIED ABOUT MY MOM after my dad died, but he had everything in order. It allowed us to focus on our grief instead of being bogged down in financial paperwork and family bickering.” That’s one of the candid responses Merrill Lynch and Age Wave received when they interviewed more than 3,000 Americans 55 and older for a comprehensive look at attitudes and practices surrounding legacy planning. From How do you want to be remembered…
You will need to review and
update your plan over time. But, just
knowing you took all these steps should improve matters for you and your family
now! Contact our office if you have
questions so you can “don’t worry, be happy!”