Tax Planning to Review NOW

In 2017, President Trump signed into law the Tax Cuts and Jobs Act which put in place many beneficial tax changes that are set to expire in 2026. Among the changes implemented, the most applicable are the cuts to individual income tax rates, a doubling of the standard deduction and a large increase to the estate tax exemption. If Congress doesn’t extend these, the benefits to taxpayers will expire on December 31, 2025. In this blog, we will focus on the income, estate, gift & charitable planning opportunities to consider, as well as a very recent update from the IRS on mandatory distributions from inherited IRA accounts.  

Inherited IRA Mandatory Distributions

New tax law from 2019 states that any non-spouse who inherited an IRA starting in 2020 had 10 years to empty that IRA. Unfortunately, much confusion arose around whether annual distributions were still mandatory or whether individuals could keep the full amount of the IRA invested for 10 years. Just last week, the IRS decided to further postpone enforcement of annual required distributions for these inherited IRA’s for 2024….(But importantly NO changes were made to the 10-year rule for withdrawing the full account; this is still a requirement.)  

So, does this mean you should NOT take an annual distribution? Not necessarily. Of course, every individual’s situation is unique, but we will offer this: If you inherited an IRA anytime after 1/1/2020, you SHOULD have a tax strategy around how you plan to empty the account within 10 years. There are a number of ways to think outside the box and save some money in taxes by planning out a 10-year strategy. 

Income Taxes

If Congress doesn’t act, the current income tax brackets will revert back to the pre-2017 rates, with the largest impact being highly compensated individuals in the highest tax bracket. These taxpayers will see the top rate go from 37% to 39.5% for ordinary income including wages, required minimum distributions, interest income, non-qualified dividends and other types of income. With this in mind, individuals might want to consider a ROTH IRA conversion; for self-employed individuals, consider shifting income into 2024/2025 (where possible) and out of 2026…and also consider holding off on tax deductions that might be more valuable in 2026 if rates go higher!

Estate Taxes

Under current rules, a married couple can transfer--during life or at death--a total of $27.2M (up to $13.6M for an individual) without being subject to federal estate taxes that range from 18% up to 40%! This tax exemption is set to expire in 2026 and--if no prior action is taken—this exemption will revert back to pre-2017 levels (plus inflation) or about $7M for an individual and $14M for a couple. It is important to remember that a person’s taxable estate includes items that may be overlooked; for example, the current market value of your primary residence (NOT what you paid for it), cars, jewelry, paintings/artwork, collectibles, boats, life insurance policies, 401ks & business ownership. 

The exemption levels seem very high, but when you consider all these items, some families may have a taxable estate even if they didn’t think they would. If you currently have or will soon have a taxable estate, it may make sense for you to take advantage of the current exemptions. You should also consider if your state has estate taxes - New York does but New Jersey does not.

Gifts

A great way to reduce your taxable estate is by utilizing the annual gift tax exemption rule, which allows for individuals to gift up to $18,000 per person per year ($36,000 for a couple) without triggering any gift taxes; this does not reduce the lifetime federal exemption (as discussed above). When completing a gift, a donor should consider the cost basis (i.e., what he/she paid for the asset) when gifting an asset directly to an individual. 

When an asset (e.g., a stock) is gifted during your lifetime, the basis is “carried-over” to the recipient. However, when someone inherits an asset after someone passes away, this asset receives a “stepped-up” basis equal to the fair market value at date the decedent passed away. When completing gifts, make sure to consider this in your planning, as it could result in a huge tax avoidance. Additionally, if you have children/grandchildren, you can “front load” five years’ worth of gift tax exclusions or up to $90,000 (that’s $180,000 for couples) to a single 529 account! The Tax Cuts Act increased the benefits for 529 accounts, which can now be used for K-12 education costs of up to $10,000 per beneficiary. Previously, 529s were only to be used for post-secondary schooling costs. 

Charitable Giving

For those with philanthropic goals, this tax law increased the annual deduction limit for cash contributions to public charities to 60% of adjusted gross income (AGI) from 50%. This limit will go back to 50% in 2026 if no further action is taken. If you haven’t already, you should strategize how to best time your charitable donations to take advantage now or potentially wait to see if these deductions might be more valuable in 2026.

In summary, the Tax Cuts and Jobs Act of 2017 created some opportunities for significant income and estate tax planning. As with most financial planning matters, there is not one correct answer for everyone, and you should consider your own personal circumstances before implementing any of these strategies. 

Feel free to reach out to us if you should have any questions. Thank you!

Best,

NCM Capital Management

Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services.  For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV. Readers are encouraged to consult with their own professional advisers, including investment advisers and tax/legal advisors. NCM Capital Management, LLC does not provide legal or tax advice. NCM Capital Management, LLC can assist in determining a suitable investing approach for individuals, which may or may not resemble the strategies outlined herein.