The time for year-end tax and estate planning is now, and this year it’s particularly important to get started as certain provisions from the Tax Cuts and Jobs Act will end soon. Plancorp’s Susan Jones, JD, CFP® joins the show to explain these important planning opportunities that deserve your attention before the end of the year.
Listen now and learn:
- The role tax projections play in long-term financial planning
- Multi-year planning opportunities for retirees, people with stock options, and business owners
- Potential impact of changing tax laws on the horizon
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Show Notes
The time for year-end income tax and estate planning is now.
When the sweeping legislation contained in the Tax Cuts and Jobs Act became effective in 2018, the termination of certain provisions (referred to as “sunsetting”) at the end of 2025 seemed far away. But with 2024 approaching, you’re running out of time to take advantage of strategies that require multiple years of planning.
Susan Jones, Senior Wealth Manager and Shareholder at Plancorp, joins me to talk about these types of year-end planning opportunities and more. Susan has over twenty years of experience serving individuals, families, fiduciaries, private foundations, and their related entities with a focus on sophisticated income, gift, and estate tax consulting and compliance, proactive executive compensation planning, and succession planning.
Listening to our conversation, you will undoubtedly see that Susan understands the many facets involved in creating a successful multi-generational family legacy and uses a forward-looking approach to help clients grow and preserve assets, reduce taxes, and realize both their financial and non-financial goals.
These are my notes from our conversation:
What is Year-End Tax and Estate Planning? (1:30)
Year-end income tax planning often involves trying to accelerate deductions and defer income while being sure to take advantage of lower marginal tax rates and avoid income bunching in future years.
Year-end estate tax planning generally involves maximizing the use of the annual exclusion and accomplishing more complex planning which involves transferring assets outside of one’s estate so that future growth escapes being subject to estate tax.
When the sweeping legislation contained in the Tax Cuts and Jobs Act became effective in 2018, the termination of certain provisions (referred to as “sunsetting”) at the end of 2025 seemed far away.
But as 2024 approaches, and with the need for multi-year planning in many cases – it’s time to consider the impact of the sunset on year-end planning.
The Importance of Tax Projections (4:30)
A tax projection, or tax modeling, shows what the future might look like based on a set of assumptions. They are most impactful for people who have control over the timing of their income.
We start with the income and deduction information from your last tax return and adjust for anything we know about the current year—including changes in income, tax rates, potential deductions, and so on. Then we calculate what your taxes would be based on those conditions.
The more we know about your current year’s finances, the more accurate the projection will be. That’s why we often wait until later in the year to run a projection. But for clients with more complex finances—such as business owners, executives with lots of non-salary compensation, or someone retiring this year or next—we might run a few tax projections a year based on different scenarios.
Basically, any time there’s a big change in your finances, we can run a “what if?” analysis to see the combined federal and state tax cost of every additional dollar of income you generate or deduction you take.
The exercise not only helps create a framework for making financial decisions but also helps eliminate surprises. Similarly, it allows you to pay your tax bill fairly without leaving the IRS a tip.
Read more about How Tax Projections Help You Make Better Financial Decisions
Common Year-End Tax Planning Strategies (8:40)
Our year-end tax planning with clients often includes maximizing charitable contributions, taking advantage of lower tax brackets, and, where applicable, equity compensation strategies.
Knowing that the TCJA sunset is just about two years away, we are reviewing not just the current opportunities, but evaluating how the impending change could impact planning.
Since income tax brackets are slated to revert to pre-TCJA levels (e.g., the top tax bracket increasing to 39.6% from its current 37%), the typical adage of deferring income may not be the wisest move. Not only is the top rate increasing, but the middle tax brackets will expand to capture people who are in a lower bracket today.
This may make Roth conversions even more attractive for clients in pre-RMD years who can take advantage of lower marginal rates. With the RMD age for many now extended to age 75, this can be particularly advantageous for the early years of retirement.
For clients with charitable intent, we are always looking for the best way to benefit a favorite charity in the most tax-advantageous way.
- Make charitable gifts in years of high ordinary income. A great way to do this is to use a donor-advised fund to “bunch” gifts to obtain maximum current deductions while maintaining flexibility in distributing the funds to charity in later years.
- Utilize long-term appreciated stock to make charitable gifts rather than cash. This gives you the ability to claim fair market value as deduction value without recognizing capital gains on appreciation and enhanced tax benefits.
- Donors aged 70 ½ or over can gift up to $100k from IRA directly to charity per year without recognizing income.
- Under the TCJA, the deduction for cash contributions directly to charity increased from 50% of AGI to 60%, including for gifts to a donor-advised fund. After the sunset, this limit will revert to 50%, so particularly generous donors should consider maximizing gifts now.
The TCJA limited the deduction for mortgage interest to interest on a maximum principal amount of $750k for mortgages taken out after the fall of 2017. This principal amount will revert back to the pre-TCJA amount of a combined $1.1 million ($1 million on qualified debt and $100k for home equity interest).
Alternative Minimum Tax Considerations With Incentive Stock Options (17:15)
The alternative minimum tax (AMT) is an alternate tax calculation that is calculated by removing many of the typical income tax deductions (e.g., state, local, and property taxes) and in some cases including additional income (such as from the exercise of incentive stock options), so it can result in a higher tax liability.
The TCJA significantly increased the AMT exemption amount (i.e., the threshold at which a taxpayer is subject to the AMT), but this exemption amount will return to pre-TCJA levels in the event of sunset, meaning more taxpayers will be subject to the AMT.
The exercise of incentive stock options (ISOs) isn’t considered to be income for regular tax purposes, but it is considered income for AMT purposes. This can result in AMT being due in the year of exercise.
For people with ISOs that will be available to exercise pre-2026, they need to take the potential change of exemption into account in developing an exercise strategy. Of course, you don’t want to let decisions be governed only by taxes as you develop an exercise strategy—this should just be one consideration in an exercise strategy that is often complex and includes many factors.
What to Know About the Qualified Business Income Deduction (20:30)
The TCJA created a new tax deduction for business owners known as the qualified business income (QBI) deduction.
It permits certain pass-through entities (including sole proprietors, partnerships, and S corporation owners) to deduct up to 20 percent of their business income, although subject to certain income thresholds and other limits.
This deduction is also slated to sunset at the end of 2025. As a result, accelerating income to obtain the 20% deduction may provide significant tax benefits for business owners who qualify for this exemption.
Year-End Estate Tax Planning (24:45)
In 2023, estate tax exemption is $12.92 million per individual, so a married couple can transfer a total of up to $25.84 million without triggering federal gift taxes or estate taxes. With sunset, the estate tax exemption will revert to $5 million per person, or about $7 million after factoring in inflation. Treasury issued regulations in the fall of 2019 that confirmed that taxpayers who take advantage of the increased exemption amount will not owe additional estate taxes at death if the exemption is reduced.
Because complex estate planning strategies can take multiple years to fully implement, we are helping our clients be mindful of the potential exemption reduction and start planning now.
Some ideas to consider:
Annual Exclusion Gifting
You are allowed to gift up to $17,000 a year ($34,000 for married couples filing jointly) to as many individuals as you wish without using any lifetime gift and estate tax exemption. You may gift cash or property, including marketable securities.
When gifting to family members in a lower tax bracket, gifts of appreciated stock can have both gift/estate and income tax benefits.
Also, don’t forget to take advantage of gift tax exceptions for gifts of tuition made directly to an educational institution.
For individuals who may have a taxable estate, create Spousal Limited Access Trusts (SLATs)
SLATs are irrevocable gifting trusts that move assets and future appreciation outside of one’s taxable estate but include a spouse as a beneficiary so that the grantor has indirect access to the funds in case they are needed in the future.
In order to have SLATs created by spouses for the benefit of the other recognized for gift tax purposes, it is often advised to create them at different times, even in different tax years
Therefore, to complete these prior to the sunset at the end of 2025, you would need to start no later than 2024.
The GST exemption is also scheduled to sunset and be reduced at the end of 2025. Therefore, utilize it to make SLATs or other gifting trusts stay in trust for multiple generations by creating dynasty trusts.
Resources:
- Get in touch with Susan Jones, Senior Wealth Manager and Shareholder at Plancorp
- Articles by Susan Jones on Tax and Estate Planning Insights
- Read more about How Tax Projections Help You Make Better Financial Decisions
- What’s the Gift Tax Exclusion for 2023? (article)
- Estate Tax Exemption Amount Goes Up for 2023 (article)
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Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.
Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.
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