Estate and Gift Tax Planning
Given the significant increase in the federal estate tax exemption to $5,000,000 per individual ($10,000,000 combined for married persons) beginning in 2011, and as adjusted for inflation for subsequent years, the focus for many has shifted to income tax planning. The federal estate tax exemption for 2015 will be $5,430,000 (or $10,860,000 combined for married persons).
Currently, the lifetime gift tax exemption amount tracks the federal estate tax exemption for decedents of $5,340,000 for 2014 (and $5,430,000 for 2015).
Beginning or continuing annual gifting programs:
From an estate and gift tax planning prospective, the most commonly used method for tax-free giving is the annual gift tax exclusion. The annual gift tax exclusion allows a person to give up to $14,000 (for 2014 and remaining at the $14,000 level for 2015) to each donee without reducing the donor’s estate and lifetime gift tax exclusion amount. A donor is not limited as to the number of donees to whom he or she may make such gifts. Further, the annual gift tax exclusion is applied on a per-donee basis ($14,000 per individual donee). In addition, spouses may combine their exemptions in a single gift from either spouse. Accordingly, married donors may double the amount of the exclusion to $28,000 (by sharing in the gift of one spouse). Note that such transfers may also save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the “kiddie tax.” Qualifying tuition payments and medical payments may also be made or continued. These amounts do not count against the $14,000 annual exclusion limit.
If a written valuation is required in connection with an annual gifting program, consider that you may be able to utilize a single valuation for gifts made in December of 2014 and January of 2015.
Low Interest Rates Signal Opportunities to Transfer Assets:
Interest rates remain low, thus very favorable opportunities continue to exist to make transfers intended to shift appreciation out of one’s estate for estate planning purposes. If potentially subject to estate tax, the current interest rate friendly environment makes it an opportune time to consider more sophisticated estate planning strategies such as grantor retained annuity trusts, sales to intentionally defective grantor trusts, charitable trust planning, loans to family members, and other planning techniques. These sophisticated planning techniques are only successful when the investment performance achieved exceeds certain interest rate assumptions embedded in the Internal Revenue Code.
Income Tax Planning
With regard to income tax planning, higher income earners have unique concerns to address when considering year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).
For purposes of income tax planning for taxpayers across the board, you may wish to consider traditional income tax planning techniques intended to reduce your overall tax liability for 2014. In analyzing appropriate planning techniques, you should review the overall impact of any such planning for the two year period of 2014 and 2015. Traditional income tax planning options include the postponement of income until 2015 and accelerating deductions into 2014. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI). Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket in 2015 due to changed financial circumstances. For example, it may be advantageous to try to arrange with your employer to defer a bonus that you may be entitled to until 2015. Also with regard to accelerating deductions, consider using a credit card to pay deductible expenses before the end of the year, including charitable contributions. This can increase your 2014 deductions even if you do not pay your credit card until after the end of the year. If it is expected that you may owe state and local income taxes when filing your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before the end of the year to permit the deduction of such taxes for 2014. You may also be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions (certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions. Common income tax planning may also include selling capital assets (such as stock investments) for the purpose of generating a capital loss to offset any capital gains that you have already realized for the year. When considering year-end tax planning moves it is also important to take into account the potential impact of such planning on the alternative minimum tax for 2014.
Retirement Planning for 2014
Tax-saving opportunities continue for retirement planning. A taxpayer still has the ability to convert funds in a traditional IRA (including SEP’s and SIMPLE IRAs), §401(a) qualified retirement plans, §403(b) tax-sheltered annuities or §457 government plans into a Roth IRA. You may wish to consider converting money which is currently invested in depressed stocks (or mutual funds) into a Roth IRA if you are eligible to do so.
Further, with respect to IRA conversions, if you converted assets in a traditional IRA to a Roth IRA earlier in the year, and the assets in the Roth IRA account have declined in value, if you leave things as is, you will pay a higher income tax than is necessary. You can back out of the transaction by recharacterizing or undoing the conversion by transferring the converted amount (plus earning, or minus losses) from the Roth IRA back to a traditional IRA by way of a trustee-to-trustee transfer. You can later reconvert to a Roth IRA, if doing so proves advantageous.
Note that Congress has yet to act on a number of tax breaks that expired at the end of 2013, including the tax provision which permitted tax-free IRA distributions of up to $100,000 by individuals age 70 ½ of older to certain charitable organizations. Stay tuned for end of the year tax developments.
Note that the foregoing is only a general discussion of some potential tax planning techniques. Any such tax planning needs to be tailored to a taxpayer’s unique circumstances and the techniques discussed are not necessarily beneficial for everyone. If you wish to further explore potential tax planning techniques specific to you, you should consult with your tax advisor.
Mark E. Kellogg, an attorney and CPA, is a shareholder with Fraser Trebilcock. Mark has devoted his 28 years of practice to the needs of family and closely-held businesses and estate and succession planning. For more information or to discuss your estate planning needs, e-mail firstname.lastname@example.org or call 517.377.0890.