Year-End Tax Strategies | Part I

As an introduction, we thought 2022 was a really interesting, challenging year. 2023 is turning out to be quite the same, with some added components. I think most of you on this call are probably feeling the impact of inflation and the high interest rates. We're seeing how that's impacting the real estate market, but is having just such an impact overall, and we'll talk a little bit about how to consider that. But obviously, there's other things going on with different wars and a lot of market volatility and other items, so we know that everyone is really impacted by all these different things. So, anything that you can do to manage your finances and manage your taxes will probably be welcome to find ways to save some money.

Today, we're going to be talking a little bit about some of the tax acts that come into play, the Inflation Reduction Act and the SECURE Act of 2022. So, those are the two tax acts for those people that like to know what those things are. We wanted to put that out there. So our agenda today, we're going to talk a little bit about income tax planning for individuals, and then move on to estate and gift tax considerations by Lisa, and then Cindy will finish it by talking about the philanthropic planning opportunities. At the end, hopefully, we'll have a little bit of time for questions and we'll look to answer questions online throughout and we'll talk about that, we'll see where we end up at the end of the session.

Okay, so individual income tax planning. So last year, we did this presentation and we talked about a lot of specific things, and as I was going through the information for this year, I just wanted to do some level-setting about just tax planning and really, what is it? And we have many participants on this call, and we understand that some of you may be looking through it for yourself, and you may have a good understanding of taxation. Others may need more assistance, and some of you may be tax professionals. But just from a level-setting perspective, we really want when you're looking at proper tax planning, it can achieve many different goals.

One of which is to reduce the current year's tax liability, which is great to save some money or reduce tax liabilities in future years, trying to take advantage of different credits that may be available, and those things are consistently changing year-on-year. Avoiding underpayment penalties, and this is going to be very significant, especially with the high inflation. And I guess lastly, just really managing your cash flow. One of the things that we often hear from our clients is that they don't want any surprises. So if it becomes April and you're going to file your tax return, and you have a large tax liability, and you weren't expecting that, that's not going to make you feel good. So really, managing cash flow and then ensuring that if there's other things that you want to do with your money for your family to manage the amount of wealth and other things. So, lots of things to consider here. What you may want to do for your particular situation may touch upon some or all of these different components.

The first thing I always say is you have to get organized. I know most people do seem to procrastinate when it comes to looking at their taxes, or completing their tax return, or just even looking at some of their financial things. They just worry that it's not going to be what they want it to be or something so they put it off. But really, in order to understand your tax liabilities and your financial situation, you really do need to get organized. Complete an inventory of your financial assets and investments, take stock of what you do have, checking your pay stubs and tax withholdings. And this is something we really see often where someone maybe changed jobs, and they didn't set up their withholding properly, and the end of the year comes and they look at their W2, and their withholding's only 10%, and it really should have been 20%, and now they have a shortfall or something. So, checking your pay stub and just doing that on a regular basis and ensuring that you're seeing what is deducted what it should be.

I've really promoted on our last call that we did last year establishing an IRS online account, and this is really good to see the status of things. We're seeing a lot of identity theft happening, and we've had instances where somebody goes to file their tax return and we get a notification, "Oh, the return can't be electronically filed because the return's been filed already." That's not a good thing. So having an IRS online account, and you can do this just going onto the IRS website at IRS.gov, you can see the status of your tax filings, the tax payments that were made, if there's any assessments or any other letters that were there, so you can really have a view of your tax situation.

From a planning perspective being organized, you can understand, "Well, what income sources am I going to have this year? When am I going to receive this income? Is it something that we're going to consider in 2023, or can we defer it to 2040?" And the same thing with your expenditures: do you have expenses that were incurred and pending, so you want to take the deduction this year or next year? Just understanding what you have to date. So, we always try to do this session in November, and the reason for that is that, really, for this purpose getting organizing and is there something that you should be doing before December 31st that will make an impact on your current year taxes? But you can also consider gifting, maximizing your retirement contributions, completing your HSA contributions if you haven't done so, and not forgetting about if you do have flexible spending or dependent care spending accounts, understanding what the company policy is regarding rollovers. Often, those expenses need to be incurred in the year in order to get reimbursement for that. So you don't want to lose out on those monies that you put aside.

Cash flow management, as I mentioned, is a really good planning opportunity and it is really important to calculate your current year estimated taxes. If you just have wages and maybe some interest dividends or other items, it may not be as crucial to do that. But if you are receiving income from other sources, from a business or other investments, you really need to understand what your estimated tax liability is. And we wanted to really highlight that this year in particular is that with the interest rate doubling, the penalties have doubled. So previously, if you did not pay in the appropriate amount of tax, then there would've been an underpayment penalty and it was at a rate of about 4%: that rate's now 8%. So it really becomes more significant.

So, how do you avoid the underpayment penalty? You will not pay a penalty if you pay in 90% of your actual tax for the current year, or if you would've paid in 110% of your prior year's tax. And those payments can be made through withholding or estimated payments, and you want to make those estimated payments timely.

Just recently, I was working with a client, and just submitted his information beginning of October to do his 2022 tax return, always waits till the last minute. We finished the return, and the return showed an $80,000 refund, and his income is about $500,000, so that's about a 16% overage. And his perspective was, "I really didn't know how to set up my withholding and I was expecting some other money, so I just told him to withhold more." Well, now, he's waiting on an $80,000 refund, and first if we did his return in April, which it could have been completed, then would've got the refund six months ago, or if did a little bit of planning during the course of the year, could have reduced that completely. So, that's a lost opportunity, receiving such a large refund. But also works in the reverse: if there was a large balance due, then there would've been underpayment interest charged on that. So, we really want to make sure that you kind of get those numbers right and you have a sense of what you have, especially in the current environment.

So I set up the presentation to talk about income deductions and credits. Those are the main categories when you're thinking about overall planning. From an income perspective, there may be ways to defer income if you're running a business and maybe there's not payments that you're not going to receive, you don't receive them until next year, or maybe if you're going to sell something, do that next year. So sometimes, it is appropriate to defer income if you think that the regular tax rates and everything are going to be about the same year upon year, and you'll get some benefits so you defer the income, so you don't have to pay the tax till next year, but maybe the rate is better.

The IRS actually just published the inflation adjustments for 2024, and what has happened there is that the standard deductions a little bit higher, but the tax bands have been expanded. So, if you're making the exact same income in 2023 and 2024, your tax would be lower in 2024 just because of the expansion of the tax bands. So that's the type of view that you want to do to look at to see which is better. Sometimes, it's better to accelerate income: if you're expecting some transactions next year, which are going to really increase your income, you can accelerate some income.

Some of you might have incentive stock options, and this is always something to really do a little bit more thought about because with the incentive stock options, basically what would happen is that when you exercise them, that's Amt income. And sometimes, it is better to exercise the options and then sell them right away to realize that income as opposed to waiting for a year for it to be considered capital gain property. So one of clients recently I just did this analysis, they sold quite a bit of incentive stock options and when we went through it, we did different scenarios to see what would be best. We came to the conclusion of the stock options that were exercised, there was a large portion of them that the individual then sold in order to minimize the tax liability. So, always things to consider.

And then, as far as capital gains and capital losses, some of you may have had losses last year, 2022 was an off year, and we definitely saw a lot of people had losses, and if you did have loss carryovers, there may be some opportunity to, if there's something that you have that you may want to sell to realize a capital gain that you can sell this year to offset those losses. So, that's why you really want to take a look at your entire portfolio and understand what you have. And on the flip side, if you have capital gains this year, they may be something that you want to dispose of that has a loss to reduce those capital gains.

One thing I always caution with capital gains is if you are invested in mutual funds and you do have different investments, often there may be capital gain distributions from those accounts: you have to take account for that when calculating your capital gains. A lot of times, people overlook that and they're just looking at what they actually sold. So, definitely a pointer there to make sure you have a good view of everything.

Just wanted to touch on the wash-sale rules because we're talking about selling different securities. So, you really want to be careful with this rule because if you do sell an investment for a loss and replace it with the same, which is considered what they call substantially identical, and usually that's like if you sell A stock and then you buy A stock again, I mean normally you can completely identify what that is, if you do that within 30 days before after the sale, then that loss would be disallowed. So, when you're calculating what your capital gains are and your capital losses, if you fall into this category where you have a wash sale, then that loss will be disallowed. What I do see on most brokerage statements now, they are very good about including the cost basis, what is a wash sale, and having that information. So, you should be able to see that in your investment accounts.

One of the things that I think a lot of us are going to see a lot more of in 2023 are these 1099Ks, and this 1099K is to report payments received through credit, debit, or store cards, or through payment apps or online marketplaces. So, this could be where you're receiving payments through Venmo or PayPal, maybe you went onto an Etsy account and you sold a product or you sold something there. So with those different things, there is now reporting that is required for that. So prior to 2022, you would only receive a 1099K if the payment received was more than $20,000 and you had more than 200 transactions. So, that's basically something that's in the business of selling. But there is a realization that there is so much gig work out there and people are doing so many different things that they're paying contractors via Venmo or paying your housekeeper or paying different people, so they're seeing all these different payments and wanted to be able to capture that.

So, 2022 was labeled the transition year to give third party networks some time to be able to understand what they need to do for reporting perspective. But beginning with 2023, 1099Ks are supposed to be issued. So, if the payment is more than $600, regardless of transaction numbers. These forms are prepared by January 31st, and then will be distributed. And really just a point of reference here, if you do receive this, go through it, check it for accuracy, should you even be receiving this. Maybe what they're reporting is a payment that you sent to a family member for something or some sort of reimbursement, so it should not have been reported. But in many cases, if it is something that is to be reported, then it comes down to what gets reported on your tax return.

I often have been seeing them lately where people sell clothing, personal items on these different websites. And per the IRS site, there's two ways that those can be reported for personal items sold: you can either report it on Schedule 1 of other incomes, you report the gross payment there, and then you report there's an item where you can report adjustments. So then, it becomes a wash. So you're reporting the income and you're saying, "Well, your basis for that income is the same, or it's probably more, but at least the same, so it's zeroes out." Or you can also report this on Schedule D. So you report on Schedule D, you show the payments as the gross proceeds, what the basis is for that, and then it would zero it out. So with personal items, you can't take a capital loss or anything on that. So basically really, it's just report it to show that you received the income, but your basis was either equal to or higher than what that amount is. So at the end of the day, it creates a zero transaction.

But I'm definitely expecting to see a lot of these forms as we get into the 2023 tax filings. So, this is what the 1099K looks like, just from a reference. It'll include the gross payments. There's an area here, line three, for the number of payment transactions. And there's also something here for federal income tax withholding. I think if you're in the business of doing a lot of transactions, you may have had federal income tax withholding, but if you're just selling personal items and doing some ad hoc activities, then you probably will not have any federal income tax withholding or should not have it.

Okay, deductions. Similar to income, you can determine if you want to prepay some deductions or defer some deductions. And this again will depend upon what you believe your situation is for the current year versus next year. And by doing so, it may be able to maximize a deduction by prepaying it, or by deferring it, maybe if you have more income in the following year, and by deferring that deduction, it balances out your income and deductions. One of the things that we do talk about, I know Cindy will talk probably about this a little bit more, is about bunching of charitable contributions. And you could also do that maybe with medical expenses, try to bunch of them where you try to pay more of them in one year so that you can actually get the benefit of the deduction, and we'll go through a little bit of example of how that works.

So when talking about bunching of deductions, in this example, we have a married couple and we want to just say they have $10,000 of real estate taxes each year, and they gift about $30,000 per year. When we go through the example, we want to say, "Well, over a five-year period, looking at those deductions, if those deductions were front-loaded from a charitable perspective, what would that tax difference be?"

So there's a lot of words here, but I'll just skip to the table and I think that'll show it better. So, as you can see here, if person contributes the same amount annually, $30,000 of charitable, same thing of property taxes, and the standard deduction will change a little bit each year, but for illustration purposes, let's assume it's the same: by doing that over a five-year period, they'll be able to take total deductions of about $200,000. But by front-loading those charitable contributions, you're taking that $150,000 in year one. Over the course of those five years, your total deductions would be $270,000. So, you're getting an additional $70,000 of deductions by doing this, by bunching the charitable contributions. And that amounts to about right now, using the current tax rates, probably about a $27,000 tax savings by doing it this way. And this may not be feasible based upon-

Patricia Kiziuk: We're doing it this way. Now this may not be feasible based upon your situation, but you can look at it maybe not over a five-year period, but over a two-year period, over a three-year period, and that may result in different savings.

So one of the things that I did want to point out with charitable contributions is that it is limited based upon your adjusted gross income. And I know Cindy will talk a little bit more about this so she can go into those details, but you really want to make sure that you understand that it may be that based upon if you do gift quite a bit, it may be that you may not get the full deduction in the current year, but you can be able to carry forward any excess contributions.

So it's really important to understand that if you're gifting cash, the limit is 60% of your AGI, but if you're gifting other things like donating appreciated capital gain property, that's 30%. One of the things that is not really on the slides here is that one way to also maximize charitable contributions is like gifting appreciated stock. Because if you gift an appreciated stock, you have stock in a company and it's done really well, if you sold that stock, you would realize a capital gain. And then if you took that cash and then contributed to a charity, well, then now you're paying the tax on the capital gains and then getting the deduction, whereas if you gifted the appreciated stocks directly to the charity, you would get the benefit of the deduction. So it does cut down on paying any capital gains on that appreciation and getting the full value of the deduction. So that's something that depending upon what your situation is, sometimes it is much more beneficial to gift appreciated stock versus cash.

A qualified charitable distribution. This is another way when you're gifting. This is available to those that are over the age of 70 and a half. And how this works is that if you are taking distributions from your individual retirement account and if you make a gift from that distribution, what that will do is that actually that'll reduce the amount of income of your distribution. So often, if you think about this, if you were taking money out of a certain amount and then using that payment as a charitable contribution, so it's income and then a deduction.

By doing it as a qualified charitable distribution is that that deduction reduces the income. So it ends up changing your above-the-line income. So this is something that you may want to consider or you may want to consider with your clients if they are doing various charities and they are taking distributions for their IRAs to make those distributions via the IRA to reduce their overall income. Now, for 2023, you can actually elect to make a one-time gift of up to 50,000 to a charitable trust. So this is something that they just added, and there is the perspective that the 100,000 may be adjusted for inflation going forward, so keep your eyes on this section.

Okay, so Astrid, I think we're at our polling question.

Astrid Garcia: Polling Question #2

Patricia Kiziuk: So this is a question to kind of that I'm curious about to see if you actually are paying attention to your information throughout the year. And if not, today's the day to make that change and to put some time into this. I consider looking at your tax and financial information a wellness activity. So it is really something that we often don't do things for ourselves, but this is really important because it can reduce stress in your life, but it can also give you opportunities to save and to have money for the future.

Astrid Garcia: Thank you. I will now be closing the polling question. Please make sure you submitted your answer. And here are the results back to you.

Patricia Kiziuk: Excellent, that's really good. So we're almost at 90%, so that is really, really good.

Okay, so I want to talk a little bit about planning with retirement plans and maybe talk a little bit about the backdoor Roth. And there's also some changes with the SECURE Act. So we just want to touch upon those different things.

With retirement plans, there's a lot out there. There's a lot of nuances. So going to give just a little bit of overview of some of the key items. Requiring minimum distributions, RMDs. So once a taxpayer turns 72, there is a requirement to start taking money out of their IRA, their individual retirement account. And when you do the first year, that first year distribution can actually get deferred to April 1st of the following year. So starting in January of 2023, the RMD age was increased to 73. So that's one of the new changes. And then beginning in 2033, that age increases to 75. So that's the rule as of today. Who knows where that'll be? That's 10 years out. A lot can happen in that time, but right now, 73 is the magic number.

As I mentioned before, you can forego the taxable income by taking all or part of your distributions and giving it to a qualified charity. So that is one other item. So the reason why this is important is that if you don't take the RMDs, there are significant penalties, and one of the things that they did put forth is that for 2023, if there is a penalty for an RMD, if you have missed it or not fully taken it, they've reduced that in half, so from 50% to 25%, and it could possibly go down lower. I've also seen where this has happened where waivers have been requested to reduce the penalty. It is something that we do see often where that initial RMD is not taken. Usually once it's taken once, it is set up going forward, but it is something that you have to manage and keep an eye on because if you are a tax practitioner, you don't want your client to have a penalty. But also for yourself, you don't want to be in a penalty situation by not taking the appropriate distributions.

I want to just add about backdoor Roths, and this may or may not apply to all of you, but this has been a strategy that a lot of people have used where they make a contribution to an IRA, either a deductible or non-deductible IRA, and then once it's in that account, they roll it into a Roth. And the reason why that's done is that maybe because their income limitations do not allow them to contribute directly to a Roth. And the benefits of the Roth are that over time any of the earnings in that Roth are not taxable. And also, Roths do not have RMD requirements. So they are beneficial. The thing you have to be pretty careful about with these backdoor Roths is that if you do have other IRA accounts, this probably will not work because if you have the money going into an IRA account and then you roll it into a Roth, it's considered a distribution. And at that point in time it'll take a look at all of your IRAs.

But if you don't have any other IRA accounts, you can put money into, say, a non-deductible IRA, get it into the account, and then flip it into a Roth IRA account. And if you're doing that year upon year, over time, you'll have a significant balance in your Roth and it'll definitely yield a lot more earnings over time because the earnings as you pull it out later on after you've met the time requirements would not be taxable. So it's something to look at. I know a lot of people talk about it out there. So if you are thinking about doing it, just make sure that you're not going to fall into any of the pitfalls there because its planning is to get you better yield, better earnings. But on the flip side, you don't want to do something that actually puts you into a penalty situation.

With the SECURE ACT, we're also seeing quite a bit of changes for 2023 and 2024. I guess there is this perspective that Americans are just not saving for their retirement as they should be. So you kind of hear that a lot in the news, and you also hear that there's just a lot of student loan debt out there as well. So they've done a few different things. I'll just maybe just touch upon two or three of these items. So one of them, which we're finding out, is that apparently there's a lot of unused 529 money that they noticed that was out there. So they put this in for any distributions after 2023 that you can actually take a distribution from a 529 plan to roll it over into a Roth IRA. So you have to meet the IRA requirements, and there's some requirements there. The 529 plan has to have at least been in place for at least 15 years.

So if the money has been sitting there for a while, this is a way to get money out of a 529 plan and into another plan without incurring any sort of penalties. If the money is just taken for the 529 plan, there will be a penalty imposed so that if it's not used for qualified education, so I mean I'm not sure why they came up with just 35,000 and they're limiting it to that, but that is the new rule. So basically January 1st, if you have unused 529, this is an option for you.

They're also putting into place some other cost of living adjustments for the catch-up. One of the other things I thought was kind of interesting is that because people are not setting up for retirement, they've also are saying that employers will now be required to automatically enroll employees in their workplace plans and set it up with a minimum contribution rate of 3%. So I think the feeling was that employees when they change jobs, especially younger employees, are not automatically opting into these retirement plans. So they're kind of forced them into them, but then they can opt out. I guess the hope is that if they opt them in, they'll actually continue having contributions deducted from their payroll as opposed to doing nothing.

And then there's also where employers can match student loan payments with retirement contributions, and that's also kind of voluntary. So it'll be interesting to see what happens with employers with some of these things that aren't going to work, but they're trying to do things so that people can actually contribute more into the retirement plans and that it's accessible for more people for different items.

So credits, I just highlighted a few credits here. The premium tax credit just because for 2022 through 2025, there is actually more availability to this credit depending upon your overall income. So the premium tax credit is utilized for individuals who purchase their health insurance coverage from the marketplace who may not be able to get it through an employer plan. So they're paying those different premiums and then depending upon their overall income, there is the possibility for a credit on those different amounts. So that form is out there and you would get form 1095A, which shows your premiums. And this is just something that I think a lot of people just forget about. So that's why I wanted to include it on here.

I think the two more relevant idea on credits is the residential energy credits. So there are different energy credits if you're doing different energy efficient improvements around your home, doors, windows, heat pumps, anything else that is considered clean energy, but I would also just caution with any of these different types of credits, look to make sure that what you're spending would actually qualify the credits and just ensure that there's no other income limitations that apply.

And I know there's a lot of focus on these electric vehicles. So there is a clean vehicle credit up to $7500 if you buy a new EV plug-in vehicle. This is kind of interesting because there are limitations. So previously, I don't believe there was AGI limitations, but I know for 2023 in particular, there are a GI limitations. I believe it's 300,000 for married filing jointly. So this was kind of interesting. I had a client call me up recently and say, "Oh, I'm putting together some information to do some estimates." And he says, "Oh, I just bought an electric vehicle, and my dealer gave me the paperwork for the credit and everything. I'm going to send that along to him," and I know how much this person makes.

So I go, I check the limitations again to make sure I'm saying the right thing and try to then tell the individual, "Hey, you're not really going to get this particular credit that you're expecting because your AGI is too much." So that also is part of the planning aspect is that there are times where you may want to defer some of your income or accelerate different things into different years and figure out the timing to make sure that your AGI meets these different limitations. In this case, there was really no planning for the individual because the income is so high, but he went into his dealership and was completely expecting a nice credit on his tax return, which he's not going to get. So that's not a good conversation.

All right, so I think that's pretty much it on the individual side. One of the things we do have the link here just to talk about some of the inflation adjustments. All these things are going up, so we included this in here so you can see what the new standard deductions are, what the new tax bands are, and the IRS site has so much really good information, so definitely use that as a resource.

So in summary, it sounds like this is a really organized group, which is fantastic, but definitely take the time to review your income and deductions, stock options, look at any tax loss, harvesting, definitely a good way to make sure that you're balancing out your income. I just put a notation in here. So if you do have a business, just to remember that the business meal deductions expired December 31st, 2022. So they've gone back to the 50% limited. They went up during COVID to help restaurants and businesses. But it's also a good time to check to make sure that you've maximized all of your contributions to all your tax deferred accounts.

I didn't talk about PTET tax before, the pass through entity taxes, but you do want to make sure you have a handle on that. A lot of those taxes need to be paid before year-end in order to reduce your income. And so really, just understanding that right now, most states have enacted PTE tax. Three states currently have proposed tax, but I think at that point, pretty much almost all of the states will have some sort of pass through entity tax. And for those of you that may not be familiar with that, the pass through entity taxes are for partnerships or maybe S corporations where you pay the state tax through the entity. And what happens is that it reduces the amount that flows at the individual level, and this is something that is definitely beneficial due to the limitation on state and local taxes.

And a big plug I wanted to put in here is the EisnerAmper Personal Tax Guide. This is a really great tool, and it goes into a lot of detail on there. So definitely something that you may want to take a look at. It gives a lot of information. We only have a certain amount of time today to cover different topics, so we go through them fairly quickly. But that will definitely give you a lot more information, and it's a pretty good read. It's a good solid document there.

Okay, Astrid, I'm going to push to you for the next polling question.

Astrid Garcia: Polling Question #3

Patricia Kiziuk: Great. Yeah, so this guide is usually published I think at the end of January each year because it's kind of meant to be like, okay, what's happening in the current year? We do this presentation so that you can kind of close out the year and then make sure you get yourself ready, but you really want to focus on, I think it's a really good guide to look at, and hopefully a lot of you are aware of it, and it might be something that... I know I have it. I always put it up on my LinkedIn and a lot of us put it there as well.

Astrid Garcia: Perfect. I will not be closing the polling question. Please make sure you submitted your answer. Back to you.

Patricia Kiziuk: Okay. All right, so about only 59%. So this is something that's really good, and hopefully you'll be able to locate it. It is on our website. I know a lot of us put it on our LinkedIn, and the next one will be coming out in January, but you may want to take a look at it as you're doing planning for this year, the one that's already been published. Okay. Alrighty then. Well, I'm going to pass it off to Lisa so she can touch upon estate and gift tax considerations.

Lisa Herzer: Thank you, Patty. In this segment, we will discuss rate changes, cost of living adjustments, and the specifics of some basic types of trusts used in estate planning.

So, let's start with the exclusions and the exemptions. And last week, the cost of living adjustments were announced. The annual gift tax exclusion was increased to 18,000, which means 36,000 for a married couple, for 2024, up from the 17,000 that was the exclusion for 2023. The one thing that's positive about inflation is that these exclusions have been increasing. They were stagnant for a long time when interest rates were low and there wasn't a large cost of living adjustment. So now they have increased again. So for those of you that have not given your annual gift to your children, grandchildren, you have a little over a month left. However, we always recommend giving at the beginning of the year, partly because any appreciation on that gift helps when you do it at the beginning of the year as opposed to at the end of the year.

The annual gift tax exclusion for gifts to non-US citizen spouses also increased. It went from 175,000 in 2023 to 185,000 in 2024. So for a US citizen spouse, there is an unlimited amount of gifting that can occur. However, if that spouse is not a US citizen, that gifting is limited to, as I said, the 175 in 2023 or 185,000 in 2024. The gift and estate basic exclusion amount also increased to 13.61 million in 2024, which is up from 12.92 million in 2023. What that means is that if you gifted your full exclusion amount prior to 2024, you can gift an additional almost 700,000 in 2024 and still be under the amount.

The generation skipping transfer tax exemption, because they're related, increased the same amount as the gift and basic exclusion amount. However, one way to not use any exclusion or exemption is by paying medical and education expenses directly to medical providers or education institutions. So directly is the key word here. You cannot gift it to your child and tell them to pay it. It has to be paid directly to either a medical provider or the college. And then it does not count for either purpose. So it doesn't count for your gift tax exclusion, and it doesn't count for your basic estate exclusion as well. So you don't eat into your annual gifting amount and you don't eat into your estate exclusion amount. So this is a real gift, pun intended.

So we've been talking about, for the last couple of years, in fact, I was teasing my fellow presenters that I could have just used the recording from last year because there hasn't been a lot of change in the past few years in this area. And we keep talking about how back in 2017, the basic exclusion amount was doubled, and it's set to revert back to the five-plus million in-

And it's set to revert back to the five plus million in 2026. Our best guess at this time is probably it will be, if it does revert, will be around $7 or 8 million. It's important to note that you have to use the entire 10 plus million to capture that increase. So you can't just say, okay, I'll use 2 million and then when it reverts, I'll still have that full amount. That's not how it works. You either have to use the full amount now or when it reverts back, that bonus exclusion amount is deemed to be used last. Portability, which is when a spouse passes and does not use their full exclusion amount, it passes to the spouse. That, however, does not shrink to the lower exclusion amount in 2026.

So some planning ideas with the doubled exclusion amount and the GST exemption. Forgive family loans. So any loans that you forgive, there's no cash outlay right now. And if you forgive them, you could use that increased exemption towards that forgiveness of the family loan. Sale to a defective grant or trust. The same thing, forgive the loan and then the loan amount eats into that exemption. Top off existing trust. So you have trust, gift additional amounts to use that additional exclusion amount. Pre-fund life insurance trusts. So typically what happens is every year you contribute cash into an account and that account in the trust name pays for the premium for that insurance. Perhaps you pre-fund it with however many years of premiums to use that increased exemption instead of doing it annually. Reconsider your insurance needs. Consider late allocation of GST exemption to existing trusts.

So SLATs last year we did not talk a lot about SLATs because we had discussed them the previous year. So I'll spend a little bit more time this year talking about them. They've been very popular this past year. So I'll discuss just the basics again. So, what happens is one spouse of both spouses set up trusts for the other and then the beneficiaries ultimately are their children and grandchildren. It permits you to give away property but retain indirect access and that access is through your spouse.

So a couple of things. You need to have faith in your marriage and your spouse because you are giving away that property permanently to that spouse. If a couple decides to set a trust up for each other, then they must be different. So you can't have the same identical trust because the IRS could then invoke the Reciprocal Trust Doctrine. The other issue is what if both spouses don't have enough assets to set up a trust for each other? Well, the wealthier spouse can give property to the other, but there should be what we call a cooling off period to avoid the step transaction. And it doesn't necessarily have to be done by both spouses depending on the wealth level. And a lot of times people want the SLAT because of the fact that they don't want to give away... Those exclusion amounts are very large. So someone that has wealth that's less than those exclusion amounts don't want to give away everything. And so this way they know at least their spouse can access those funds if need be. And like I said, it doesn't have to be done by both spouses. Perhaps one spouse uses up all of their exclusion amount.

Another item to note is that SLATs are generally granted trusts. So the donor spouse rather than the trust will pay the trust income tax. And whenever you're dealing with a grant or trust, that's an additional tax-free gift because that tax is being paid out of the grantor's funds that aren't in that trust.

So again, plan now rather than later, you want to use that exclusion amount. I know back when the 17 act first came in 2026 sounded so far away. Next year's 2024, so we'll see what happens with the elections. We'll see what happens if there are changes. But use it now. And again, that increase of 700,000 is a large amount for 2024. So I'm sure we'll see a lot of additional gifting happening next year.

The other way to plan is by substitution of low basis assets for high basis assets in trust if it's allowed by the trust document. So in other words, if you have a low basis assets that's outside of your estate in a trust, that asset upon your death will not increase. However, if that asset with that low basis is outside of the trust and in your estate, it will increase upon your death. So, even though the assets might have similar value, you need to look at where their positions, whether they're positioned in your estate or in a trust that is outside of your estate and perhaps adjustments could be made.

The other thing is we're talking about basis is to be careful when gifting assets because you don't want to lose that basis step up when you gift assets. So if you gift an asset to someone, that basis, your basis transfers to the person that you gifted it to. So if you have an asset with a very low basis, there is a gain embedded in there. And so by gifting it to an individual that gain stays embedded in that asset. However, if you died and you passed it to them, you receive a step-up in basis at death and then the fair market value is what becomes the individual's new basis that inherited the assets. So basis is very important in the income tax world and in the estate and gift tax world as well. So it really needs to be considered.

So I know that Patty talked about some of the IRA changes and I know that Cindy will be talking about some of the charitable planning, but the one thing that I wanted to touch upon is for charitable requests because you can no longer stretch an IRA to a beneficiary other than your spouse or certain individuals, but for the most part you can't stretch an IRA anymore. I've seen more and more where we've been recommending and that people have been changing the beneficiaries of their IRA to charities because they don't pay any tax on that IRA when the distributions are received where if you gave let's say $100,000, you had $100,000 IRA and he left it to your son, when he withdraws those funds, he will incur income tax on that distribution. However, the charity would not. So instead of leaving $100,000 cash bequest to the charity and the IRA to your son, which has been typical in the past, swap it, leave the $100,000 cash request to your son and leave the IRA to the charity instead.

So, we are on a polling question.

Astrid Garcia: Polling Question #4

Lisa Herzer: So this was just two pound home once again, when that is the estate tax BEA is set to revert to that 5 million, we'd be talking about it for a long time, but it's getting closer and closer. I also just wanted to note, I can see in our question and answer we've had a lot of questions in the question and answer box here. It looks like it's at 122, so we are going to attempt to answer some at the end if we have time and if not we will get back to those that are interested in an answer. I know there were a number about the personal tax guide and that's great. We just started working on our 2024 guide, which we'll be out as Patty said at the beginning of the year.

Astrid Garcia: Perfect. I will now be closing the polling question. Please make sure you submitted your answer. Back to you.

Lisa Herzer: Okay. Great. So it looks like the good majority have the answer of when it's set to revert back to the $5 million. Great.

Okay, so interest rates. As we know, interest rates have been increasing and here are some of the new rates for November 2023. I did put the November '22 and '21 because I just thought it was so important to see the difference that two years makes. So in the estate and gift tax world, low interest rates are good for GRATs, sales to IDGTs which are intentionally defective grant of trusts and inter-family loans which are attractive strategies once a donor has used, or even if they haven't, their lifetime gift tax exclusion. Low interest rates has been bad for QPRTs. We haven't seen a lot of QPRTs, I actually in my next slide I'm going to talk a little bit about them because of the fact of the increase in interest rates, which makes them a little bit a better environment for them now that the interest rate's a little higher.

So as you can see, the November 2023 rates, 5.6% for the 7520 rate and the short midterm and long-term rates all 5 or close to 5%, where last year we were talking about a full percentage point last and in 2021 it was a quarter of that. So, the playing field is not level than it was two years ago. However, today's mortgage rates at banks if you look at them, I looked this morning and it's above 8% for a 30-year mortgage. So these rates that we're talking here are still much lower. So it is an attractive strategy to still use family loans as opposed to getting a mortgage from a bank.

And so the reason why that the low interest rates are good for GRATs and bad for QPRTs. So a GRAT pays you annuity at a fixed rate in exchange for the assets that are transferred to the GRAT. If the transferred assets appreciate in excess of that interest rate used by the IRS, which in November '23 is 5.6%, the excess appreciation will pass tax-free to your beneficiaries and it's still a good strategy. However, as you can see, two years ago even modestly appreciating assets would beat the hurdle rate when it was much lower. So it might be a little bit more difficult to beat that hurdle rate, but again, it's still possible.

So QPRTs, as I said, I will talk a little bit more about QPRTs this year than I did in the past because of the fact that the interest rates have increased. So it might be a tool that some might want to use. So a QPRTs, which is stands for a qualified personal residence trust, allows the owner of a residence to transfer ownership of that property into a qualified residence trust. And what it does is remove the value of the residence from their estate. It freezes that value. And that's only if they survive the trust term. So the owners continue to live in their homes, the trust is a grant or trust for income tax purposes and the amount of the gift is the value of the property reduced by the value of that retained interest. The reason that it's better in a high interest rate environment is that the value of that retained interest is higher in a high interest rate environment, thereby reducing the value of the gift.

There are a lot of things that you need to pay attention to if you have a QPRT and there are a number of pros as well as a number of cons with a QPRT. So during the trust term, the grantor is permitted to continue deducting real estate taxes paid on the residents. Now again, since 2017 with the SALT limit, it's not as big of a benefit, but it is a benefit nonetheless. The grantor retains the exclusive rent-free use, possession and enjoyment of the residents during the term of the QPRT. The grantor pays any necessary expenses such as the real estate taxes we talked about before, insurance, any minor repairs, paintings such as things like that. However, if the grantor makes a capital improvement, then the cost is treated as an additional gift to that trust. So that's something that you need to be aware of.

At the end of the QPRT term, the grantor can lease the residents back from the beneficiaries, which are typically the children, grandchildren at the fair market rent. This allows the grantor continue to live in the house if they wish.. And then also the rental payments that the grantor is paying to their children or grandchildren further reduce their value of their estate.

Some of the cons of a QPRT. Property really should be mortgage free when contributed to the trust because it becomes really complex for accounting purposes for those payments and also to minimize the tax consequences. So you really want to be sure that the property you're contributing to the QPRT is mortgage free. The gift does not qualify for the annual gift tax exclusion, the 17 and 18,000 that we were talking about for '23 and '24 because the transfer of the residence is not a gift of a present interest.

For the QPRT technique to be effective for estate tax purposes, the grantor must outlive the term of the trust. If the grantor dies before the trust term expires, the date of death value of the QPRT will be included in the grantor's estate and subject to estate taxes. However, the grantor's estate will receive full credit for any tax consequences of the initial gift to the QPRT. So you're really in no worse off than you were if you hadn't created the QPRT. A grantor also may establish a QPRT for no more than two residences. So it can be funded using a principal of residence, a vacation home, which a lot of people do because you think about a lot of time that passes through the generations more often than the main residence or you can do a fractional interest in either of those.

So proposed changes 2024 and beyond. It appears that the IRS is looking to allow estate and gift tax returns to be e-filed in the near future. There is no date, but I did see an article, I think it was just this past week, that that is being discussed, which would be great because the paper filing is a fiasco. Since 2020 with COVID it has just gotten worse.

And so also I just want to talk about a few things that Patty touched on that could pertain to trust as well. A lot of the similar planning techniques that she talked about. But one of the things that should be looked at is while the SALT limit remains, the state and local tax deduction, if for instance you have a trust that had little or no income in 2022 and thereby no tax payments needed to be made for safe harbor purposes for '23, but now you see that you have large gains in '23 or large income. To at least pay 10,000 of the state tax by 12/31 of '23 and then pay the remainder in April 2024. This way you get benefit of that state tax deduction in both years. So in other words, you're not required because of safe harbor to pay now. However, if let's say that state tax that's anticipated is $20,000 and you pay it in 2024, you are only going to get benefit of 10,000 because of the SALT limit on your trust. So something to keep in mind too. As Patty discussed, planning and looking at what your income looks like for now, that's the same with if you have trust, so you should be sure to do that.

The other thing I wanted to note is that President Biden's budget proposals will not technically a lot of estate changes, but looking to eliminate some of the favorable capital gains rates for a high income taxpayers. I discussed before about it's important to look at basis of assets. This would change the planning if in fact those capital gains rates were eliminated for high earners.

So another polling question for Astrid.

Astrid Garcia: Polling Question #5

Lisa Herzer: So I just wanted to note that that is 2020 because they're a little lag in when they give the amount of the number of tax returns filed and what the IRS puts out. So it is correct that it was for 2020. But what I will say is, once you get that answer, in that in 2020 there were 157.5 million income tax returns filed. So even if the answer were 41,000, you can see the disparity and it shows why there's more discussions surrounding income tax changes as opposed to estate tax changes. Because it really does, especially since the increase impact such a small number of taxpayers.

Astrid Garcia: Great. I will now be closing the polling question. Please make sure you submitted your answer.

Lisa Herzer: So the answer actually is 4,100. So most people thought it was the 41,000, but it was actually only 4,100 estate tax returns that were filed in 2020. So, that concludes my portion of this presentation and I will hand it over to Cindy.

Cindy Feder: Thanks Lisa. Patty went through some of the information on charitable giving already. Hopefully we're going to get into a lot more detail and maybe answer some questions that came up during her presentation. Before we start, it's always interesting to me to look at what the trends are in charitable giving and according to reports from Giving USA after two years of record-breaking giving that was inspired by the pandemic, the overall giving in 2022 declined. And the expectation is that 2023 will also be less, and that's because of inflation, stock market volatility, just creating an economic environment that's more challenging for people, so they're giving less. But even with the decrease, we are still seeing giving rates that are in line with what it was pre-pandemic. So, charitable giving is something that makes us feel good about ourselves and also at the same time can give us a nice charitable deduction. So, that's why this is an important topic, especially at this time of year, because at the end of the year that's when most of the charitable giving takes place.

So, when you're looking at how you want to give to charity, you definitely have to-

Looking at how you want to give to charity, you definitely have to be looking at your income tax planning goals also. So, we still talk about the TCJA, which is the Tax Cuts and Job Act because this changed the rules of the itemized deductions in general from 2018 through 2025. So, what it did was it either eliminated or reduced other itemized deductions, but the one deduction that did remain was the deduction for charitable contributions, making it more important than ever. So, it's obvious that in certain years that you have very high income, that's when you want to take advantage of the charitable deductions because when you have a marginal income tax rate, you're going to get a better deduction. So, a lot of people are doing their planning... Patty talked a little bit about bunching. People are looking at a two-year income tax projection in order to time the charitable deductions for the best benefit because what the TCJA also did was increase the standard deduction.

So, not everyone is going to necessarily give an amount that's going to have the benefit in one year, so they're looking at it over a two-year period and saying, "Well, if I give more in year one and then less in year two, I'll get the benefit for the charity in year one, and then in year two I'll be able to just take the standard deduction." So, I saw some questions that came up in terms of, what exactly does bunching mean? You can do bunching in different ways. So, you can do bunching by just giving more money to different charities that you are involved in, charities like their missions, but a lot of people try to use different vehicles that there are out there, like private foundations or donor-advised funds in order to do the bunching, so that this way they don't necessarily need to pay all of their charity out in that year that they're doing the bunching. They can put it into something, into a vehicle, get the deduction, and then decide which charities and pay it out a little bit more slowly over time.

So, this chart basically shows you that it's not just a matter of when the charitable deduction is... You have to look at a lot of different factors. You have to look at what type of organization you're giving to, what the individual's AGI is, and lastly, the type of property that's given. So, you can see that when you give to a public charity, you're going to get a better deduction. It's 50% of the AGI if you're giving cash, and it's 60% if it's cash only.

And then for property though, it's only 30% deduction of your AGI. And for private operating foundations, it's going to be the same as a public charity, but then when you get to private non-operating foundations, those AGI limitations are lower. They're 30% for cash and 20% for property, and some people might be surprised to see it. Hopefully, people realize by now that for 2020 and 2021, we had the 100% from the CARES Act, and that's why there was so much more giving during those years during the pandemic, but now the top rate for cash to public charities has gone back to 60% and is not at 100% of AGI anymore.

So, even though we said we try to plan out our charity, so that we can give it in a year, that we can deduct it, but at the same time, if you do give more in any certain year and then you aren't able to deduct it because of your AGI, you don't have to worry about it because the excess of the contributions can be carried forward for five years. So, there's an example here, and we could read it that Grace makes a cash donation to her private foundation of 2 million and her AGI is 4 million.

Her charitable deduction is only 1.2 million because of the limitations, because she gave to a private non-operating foundation, she can deduct up to 30% of her AGI, so she doesn't lose the rest of it. The excess amount of 800,000 is carried forward for the next five years. So, a lot of planning over the past few years. People try to get that deduction in the better year and try to bunch, but definitely if you make those donations and then you see that the AGI is lower, then you can still carry it forward. We also have just a reminder at the bottom of the slide that the AGI limitation for donor-advised funds is the same as it is for public charities. It's 60% for cash and 30% for capital gain property.

Also, this example, we already talked about the deductibility of donating long-term appreciated property, but we didn't go through it so in detail. Why would someone want to donate property? This chart really shows you what the benefit is. Basically, Patty had talked about it a little bit also, that you're not only getting the deduction for the property, for giving the fair market value of the property, you're also saving on not recognizing the gain. So looking at this example, it's very clear that it's more beneficial to donate the stock to charity rather than to sell the stock first and then donate the proceeds. This is definitely a tool that people use specifically with their private foundations.

This slide is basically just a list of things that you have to remember. Some of them may seem like they're obvious, but we still always have people who are coming at the end and some of these things get forgotten, so we just always like to put a little reminder in that you have to make sure you have a real legal transfer of your charitable gift by year end. So if you're giving something, you have to have the proper documentation, you have to make sure that everything's fully transferred to the charity, so that you don't think that you gave something and then turn around and have your accountant say, "Where's the paperwork? Where's the documentation?" And it's not there.

So, that's one reminder, really not a good idea to use securities that the fair market value is lower than the cost because you'll be limited to the fair market value and then in addition, lose the benefit of the capital loss. So, it's really the reverse of all the benefits that we talked about with the giving appreciated property. So, it's bad on both accounts. If the stock is short-term capital gain property, meaning that it's held for 12 months or less, the deduction is limited to the lesser of the fair market value or the tax basis. And if the property donated its inventory or subject to depreciation recapture, again, the deduction is limited to the lesser of fair market value or basis of the property. So, you really have to be aware of what you're donating. Astrid, there's a polling question.

Astrid Garcia: Polling Question #6

Cindy Feder: Right, so basically this question is meant to see if people are aware still because we still have people coming and saying, "Don't I get 100% de deductibility because of the CARES Act?" But that was only for 2020 and 2021, and now we're back to the 60% that the TCJA originally enacted for cash due a public charity. So if anyone didn't answer right away, I gave you the answer.

Astrid Garcia: A freebie.

Cindy Feder: A freebie.

Astrid Garcia: I will be closing the polling question now, please make sure you submitted your answer.

Cindy Feder: So, it looks like... I'm glad that not too many people are still counting on that 100% wiped out of their AGI, so that's good. So, the next couple of slides talk about the donation of artwork. We talk about this really more in the sense that it's just a good example of giving tangible personal property and what the rules are. So, basically one point that we want to highlight is that you can only get a fair market value deduction if the charitable organization is using it for its mission. So, if you're just giving it to them and they're going to be selling it or they're not using it, they're not a type of organization that uses artwork, then you're not going to get the deduction. So, basically what you want to do is you want to make sure that you're giving it... If you are giving artwork, you want to give it to a museum.

If you're giving some other sort of charitable property, you want to make sure that you're giving it to an organization that uses it for its mission. The next slide talks about fractional interests. Fractional interest is just something that you have to be careful about because you want to make sure that at the end of the day you're giving the full amount of the full painting, the full artwork to the charity, otherwise you can lose deductions that you've previously taken. And also the value of your deduction is going to be based on the initial value. So, those are two things to look out for. When you're donating anything, artwork or anything, that is not cash or stock, you definitely want to make sure that you have it appraised because you can't take the deduction if you don't have the appraisal and you don't have the information that you need to fill out your tax return.

So, that's just important, and actually qualified appraisers do get busy at the end of the year, so you have to make sure to take care of that. You also have to make sure that whoever you donate it to, even if they are using it within their mission, that they're willing to hold it for three years because if they don't, you could also have to recapture some of your donation. So, those are the items we wanted to talk about that. So, the next slide is talking about a charitable remainder trust. So, this is where we start talking about, what kinds of vehicles can you use in order to get to your charitable goal? There's these different types of trusts. One of them is a charitable remainder trust. A charitable remainder trust is a trust that the remainder goes to charity and the annuity goes to an individual or a non-charitable beneficiary.

So an annuity trust pays a fixed percentage, and a unitrust pays a fixed percentage based on the trust's fair market value. And there are certain rules when you're setting up a charitable remainder trust, the term of the trust can exceed 20 years. The annuity payout has to be at least 5%, but not more than 50%. And when the trust is set up, there is gift tax consequences if the annuity is going to be paid to somebody who is a beneficiary that's not the grantor. So, let's say if I set up a charitable remainder trust and at the end the charity of my choice gets the money, but during the term of the trust I'm going to be, as the grantor, going to be receiving the annuities, then there's no gift tax consequences, but if somebody else is going to be the beneficiary of that annuity then there could be gift tax consequences.

A lot of people, there's definitely advantages to this. You can diversify your portfolio, defer a capital gain, and create an annuity stream for yourself or for the beneficiary of your choice when you set up one of these and then you get a big charitable deduction based on the present value of whatever the remainder interest is, that's going to go to charity. So again, a charitable remainder trust, the charity gets the remainder, which is at the end, and a non-charitable beneficiary gets the annuity. A charitable lead trust is actually the opposite of what a charitable remainder trust is.

So in this situation, it's a non-charitable beneficiary that's going to get the money at the end and the charity is going to get the annuity. So the way this works, the thing about charitable lead trusts is that this is a good planning tool when the trust assets outperform the IRS 7520 rate because basically the future appreciation is not subject to gift tax because they're looking at the present value at the time that the trust has created. So, at times where the trust is outperforming the interest rates, it's definitely beneficial, and as Patty and Lisa mentioned, with higher interest rate right now, the benefit of this type of trust is not as good, and the next slide just has the chart that illustrates what we just spoke about. Okay, Astrid, polling question seven.

Astrid Garcia: Polling Question #7.

Cindy Feder: I was going to say I wasn't going to give a freebie, but I know a lot of these questions that have all of the above, but that is not the answer here.

Patricia Kiziuk: So, I know we're getting near the end. There's a lot of questions about the personal text guide and where to find that. So, that seems like it's probably a good percentage of the question. So, I figured while we're answering this question, I'll just throw this out there. So, if you go to the internet and you just go to the eisneramper.com website, once you open that up, you'll see in the top right corner in the search bar, you just type in personal tax guide, and then you'll actually see the 2023 guide and the 2022 guide. It looks like it's comes out each year in March. I think it might be coming out a little bit sooner for 2024, but stay tuned for that. Once it's done, it'll be available there.

Astrid Garcia: Wonderful, so I will be closing the polling question now. Make sure you submitted your answer.

Cindy Feder: So, the answer is the charitable lead annuity trust, so that was the one that was most answered. That's the one where the annuity goes to the charity. So another idea, another vehicle that's used very often when people are doing bunching is they will set up their own private foundation, a family foundation that has it... But people have to remember that a private foundation is its own legal entity with its own books and records. So, there's definitely a lot of administration necessary when you open a private foundation. A lot of people like it because they can get their children involved on the board and everybody can work together as a family for the philanthropic goals, but there are definitely a lot of rules about private foundations that could be its own class. So, definitely something to look out for that if this is something that you want to do, you have to get on board proper attorneys and accountants, so that you don't make any mistakes with this type of entity.

The 4960 tax is just an issue that private foundations had encountered, and there's a tax that if people are paid more than $1 million, then they would have to pay a certain, an excise tax on the excess, but when the final regulations came out, the exceptions really came into play and eliminated a lot of issues specifically with private family foundations and people's companies. So, that's just something to touch on. And the last thing is the donor-advised Fund, which is the most popular when it comes to charitable vehicles that people use when they're doing bunching because the thresholds are the same as it is for public charities, like we talked about before, and there's not really a lot of administration. You open up a DAF with a DAF sponsor and they pretty much take care of everything for you. The one thing to look out for this is that there is IRS scrutiny.

There's a lot of talk and a lot of proposed regulations because ultimately a lot of people feel that a DAF is going to be a place where people are going to park their money, get their charitable deduction, and the money's not really getting to the ultimate donors in a good timing. So, it's definitely something that's out there. They're looking to try to change it to push more money to maybe take away the benefits of having a DAF, but so far, nothing's come up. DAFs are very popular, and even where charitable giving is going down, the amounts that are going into DAFs are just growing. So, that's pretty much it. I don't know if we have time for any questions, like Patty said, but definitely we're going to take a look at everything that anybody put into the chat and try to get back to you with answers to your questions.

^{Transcribed by Rev.com}