The following is our checklist of year-end tax strategy items and matters we believe you should consider addressing between now and the year’s end. Many of these helpful tips require a discussion with your financial and tax advisors, and we are available to collaborate.
Before we begin, remember that your CPA and financial advisor have invaluable information that is a simple phone call away, be sure to take advantage of their experience regarding your assets. It is imperative that you run a preview with your accountant regarding how your taxes will look this year versus next year to properly plan how best to maximize your deductions (Speaking about moving money around for tax advantages).
After completing our checklist, let us know if you have any further questions by emailing us for a short consultation, but for now, let’s jump right in.
#1 Newcomers - Change the Domicile to Florida
If you just moved to Florida and still need to obtain your Florida Homestead Exemption, then make sure to meet the criteria before December 31st. Declaring and obtaining your Florida Homestead Exemption will save you a great deal of real estate taxes and provide you with valuable wealth preservation. Ask us for our change of domicile checklist.
#2 Annual Exclusion Gifting - Use It or Lose It
If you anticipate that your estate will be subject to estate tax, it is wise to consider using your annual gift tax exclusion amount (currently $16,000 per year/per beneficiary - it was $10,000 indexed for inflation). As discussed below, the advantage of giving early is significant due to the removal of assets from your gross estate and the growth of assets outside of your estate. For example, you can give $16,000 each year to each of your grandchildren, and your spouse can too!
Remember, each year, you have an opportunity to make these annual exclusion gifts (use it or lose it!)
Note: In addition to transferring assets for wealth transfer reasons, you may also pay qualified educational and medical expenses. Ask us regarding your gifting options (e.g., trust or outright, or alternative educational funding tools such as the Section 529 Plans or prepaid college plans).
It is imperative to ensure that cash or check gifts are settled within your beneficiary’s account by December 31st. Wiring funds is recommended to ensure the beneficiary does not lose track of depositing a check. Furthermore, do not wait until the last minute to send the gift as it may not arrive before the year's end. Make sure you have an attorney prepare the necessary documents for gifts of real property or tangibles to ensure the transfer is carried out correctly. Furthermore, ensure that tangible gifts are properly appraised to guarantee appropriate valuation.
Gifts to Individuals in Trust
When leaving a gift in trust, ensure your attorney has a generous amount of time to draft the trust and understands the purpose of your trust and its designated beneficiaries. Choosing a Crummey trust allows beneficiaries to withdraw their gift from the trust, qualifying the gift for the gift tax annual exclusion; beneficiaries should ideally make the withdrawal within the current year, with generous time to ensure it is completed for that year.
If you would like to discuss establishing a gifting trust for your children, grandchildren, or other heirs, please do not hesitate to contact us, and we will describe the alternative wealth preservation techniques.
Early Use of Federal Gift and Estate Tax Exemption and Maximum Leverage of Both with Eye on the GST Tax Exemption
As of 2022, married couples can take advantage of the federal estate and gift tax exemption of $24.12 million, while individuals have an exemption of $12.06 million. Such gift distributions can be given out over one’s lifetime free of federal income tax, while any amount over these limits will be taxed at 40%. After 2025, this exemption will drop to approximately $7 million, adjusting for inflation, with the tax rate increasing to 45% in 2026.
Note: The inflation adjustment for 2023 is extreme. This will provide additional gifting opportunities.
#3 Charitable Gifts
Maximize your charitable contributions
It is important to make your charitable contributions in the year that will produce the most favorable tax benefits. Speaking to your accountant and financial advisor is a great way to determine if you should bunch your deductions in one year and when you can utilize these benefits (e.g., 2022 vs. 2023).
If you wish to donate any of your retirement funds to charity, you should consider directing the funds directly to your favorite charity using the Qualified Charitable Distribution (“QCD”). This will result in the entire amount passing to charity and therefore NOT being subjected to income tax while NOT being part of your Adjusted Gross Income (“AGI”). The maximum QCD is $100,000 per year.
Please note that gifts to Charity are more lenient regarding time constraints and merely require that they be mailed or an electronic transfer be initiated before the year-end rather than being required to settle in the charity’s account. Appreciated securities allow for market value deductions; the charity can then sell them without capital gains taxes to you or the charity. In 2022, a gift to a public charity is limited to 30% of AGI when donating long-term gain assets and 60% of AGI for cash contributions. Private foundation gifts are limited to 20% of AGI for long-term gain assets and 30% for cash gifts.
IRA/401(k) distribution planning is complicated and vast. We will work closely with your advisory team to minimize taxes and maximize benefits. As you will note (from our prior reports), the SECURE Act requires that non-spouse beneficiaries take distributions of your retirement account after you pass, over a short 10-year period of time (there are numerous exceptions, including distributions to minors, disabled and chronically ill beneficiaries to name a few).
Donor Advised Fund Strategy
Donor advised funds (DAF’s) have grown astronomically since the recent tax law changes have doubled the standard deduction, eliminating a great deal of deductions. DAF’s streamline the process of charitable giving while ensuring a tax-efficient process as well. For example, DAF’s can be implemented to bunch your deductions in 2022 by contributing highly appreciated stocks without paying capital gains taxes while providing you with a large charitable income tax deduction in the year you are itemizing and not using the standard deduction (bunching). In the subsequent year or two, you make gifts to your favorite charitable causes from your DAF, taking advantage of the standard deduction. DAF’s are an excellent way to obtain a tax deduction right away while making charitable grants in the future.
#4 Income Tax Planning and Pro-forma Tax Returns
The standard rule in the accounting/tax world is to accelerate tax deductions and postpone taxable income (OR “Will you be in a higher tax bracket next year?”).
#5 Max Retirement Plan Contributions (Gifting for Children and Grandchildren to Maximize Contributions for Their Retirement Plans)
If you are still working, depending on your age and tax bracket, you should consider contributing to your retirement account - either a traditional IRA or an after-tax Roth IRA (which grows income tax-free and comes out eventually, income tax-free).
In addition to the above, if you can gift to your heirs so that they can afford to contribute, the benefits are very rewarding on numerous levels. Contributing to a Roth as a young person, the tax-free growth potential is enormous.
Suppose you already have a retirement plan but are ineligible to contribute to a Roth. In that case, you may wish to talk to your advisors about a so-called back-door Roth, which allows you to contribute to a traditional IRA with before-tax dollars and then subsequently do a permissible Roth conversion.
If you are in a high-income tax bracket, a Roth conversion might not be suitable, but a strategic small conversion each year might fit the bill.
#6 Required Minimum Distributions for IRA / 401k
Make sure you are thinking about your RMD – in your IRA / 401lk, if you’re in the pay status, it is essential to take your required minimum distribution every year, otherwise talk to your tax professional and financial advisor regarding where to take money from throughout the year to be tax efficient.
If you are over 72, delay taking required minimum distributions from IRAs until the end of the year and make withdrawals by early December.
#7 Loss Harvesting
Each year you should take advantage of an opportunity to offset (net) gains against losses. This way you will avoid income tax on such gains. If you wish to continue to own the asset which you are selling to trigger the gain recognition, you may repurchase the asset as long as you avoid the “wash sale” rules. For example, to avoid the Wash Sale rule when repurchasing a stock, simply wait the required 31-day period before repurchasing a stock or purchasing a stock within the same company’s industry.
#8 Perfect Storm
While interest rates are still relatively low, certain estate planning techniques work well. When rates are high, other estate planning techniques are more beneficial. We recommend you take advantage of the low-interest rates and low stock values at this point and utilize interfamily loans, grantor-retained annuity trusts, and charitable lead trusts. On the contrary, when rates go up, it is beneficial to utilize qualified personal residence trusts and charitable remainder trusts. The estate tax law exemption is scheduled to be cut in half starting on December 31st of 2025 - therefore, gifting NOW and using advanced techniques NOW while valuations are LOW and interest rates LOW it is the best time to move forward with your gifting NOW rather than waiting until valuations go up and estate taxes split in half.
#9 Life Insurance Administration
It is imperative to make sure that your premiums are paid for while reviewing your insurance to determine if it is funded adequately for the purposes of maintaining the policy. Usually, you would ask the agent for an in-force illustration at least once every other year.
#10 Determine If You Have Properly Administered Your Trusts
In an irrevocable trust, ensure you administer your trust properly and provide for distributions before the end of the year. You may wish to transfer the wealth to your beneficiaries to move the taxation from the trust to the beneficiary’s tax level, which may result in a lower tax bracket. Note that trusts have a 65-day rule allowing distributions to be made after year-end. Please discuss this complex issue with your tax advisor.
#11 Miscellaneous Year-End Observations
Social security is increasing substantially – go buy yourself a gift.
Net investment income tax planning – While beyond the scope of this article, please discuss this with your CPA.
Opportunity Zone Opportunities
Opportunity Zones are economically distressed communities around the county where the federal government has allowed individuals to invest capital into such communities. In return, investors receive significant tax breaks by purchasing and renovating property within the community, encouraging research and development. Individuals and businesses can invest in opportunity zones to receive preferential treatment from the IRS by avoiding capital gains tax. Please contact us or your CPA for further information on investing in an Opportunity Zone to help one’s community and receive generous tax breaks.