TRUST & ESTATE PLANNING

Tax Planning Strategies for the Year Ahead

12.10.2018 - Bryan Kirk

Tackling the Tax Code: Smart Strategies for 2020 and Beyond

With a little planning, the following strategies could take the sting out of your tax bill this year and for generations to come. As always, we’re here to help find opportunities.

Leave appreciated property to your heirs

With the estate and gift tax exemptions set at $11.58 million per person and $23.16 million for a couple in 2020, the “step-up” of income tax basis at your death is important.

If you sell appreciated property, any gains are subject to capital gains taxes as high as 23.8% for federal taxes plus potential state taxes, depending on your income. Similarly, when you gift appreciated property to your heirs during your lifetime, the gains stay with the property, and your heirs will pay capital gains tax when they sell.

However, if your heirs inherit the property at your death, the cost basis will be “stepped-up” to its then-current market value. Your heirs will only pay capital gains tax on appreciation that occurs after they receive the property. Because of the higher estate tax exemption, maximizing the “step-up” at your death can now be much more important than avoiding estate taxes, depending on the size of your estate.

Facing estate taxes? Run the numbers

The federal estate tax exemption is historically high under current law. But the exemption amount is set to go back down in 2026 and may even disappear sooner if there is a change in legislation. If your estate will exceed the exemption amount, consider gifting assets during your lifetime to use the higher exemptions before they’re gone. Due to the “step-up” of cost basis at death, giving cash or other assets that have little or no built-in gains is the most efficient way to gift during your lifetime. In any case, we can help you run the numbers to help you determine whether to make lifetime gifts and decide which assets to give first.

Bundle charitable donations with a donor advised fund

If your deductions are not high enough to itemize under the thresholds ($12,400 for an individual; $24,800 for a couple in 2020), bundling several years’ worth of donations into a single year could push you over the standard deduction threshold, allowing you to take a deduction for your gifts.

With a contribution to a Donor Advised Fund, you can take an immediate deduction and decide on the charities that will receive the funds at a later date. Donor Advised Funds can also be used to bundle gifts into years you have higher-than-usual income to help reduce the tax bite.

Donate appreciated property—not cash

If you have charitable intent and hold investments with unrealized gains, consider gifting appreciated property to charity rather than gifting cash. You avoid the capital gains that you would incur if you sold the shares, and it is possible to receive an income tax deduction equal to the full fair market value of the property you give away, as long as you held the property for more than one year.

For example, if you invested $20,000 in a stock that is now worth $100,000, you could sell the stock and recognize capital gains of $80,000. Because you will pay capital gains tax on that profit, the amount left to give to charity would be far less than the original $100,000.

Alternatively, if you gave the stock to charity directly, the charity would receive a $100,000 benefit since it can sell the stock tax free. Meanwhile, you would receive an income tax deduction for the full fair market value of $100,000 and not recognize any capital gains.

Give your required minimum IRA distributions to charity

If you are 72 and required to take distributions from your IRA but don’t need the income or the new tax laws may make it beneficial to take the standard deduction, consider transferring up to $100,000 to charities directly from your IRA.

You won’t receive a deduction for the gift, but you will also not have to include it as income on your tax return.

Maximize 529 plan contributions

You can use a 529 College Savings Account to pay for up to $10,000 a year in tuition for grammar school and high school students.

There is no federal income tax on qualified distributions or appreciation in 529 accounts, and additional tax benefits might be available in your state’s plan.

Inspect your business structures carefully

If you have a C-corporation, your business may benefit from the new flat corporate tax rate of 21%. If you have a pass-through business such as a sole proprietorship, partnership or S-corporation, you may be eligible for the 20% deduction for “qualified business income.”

The deduction for qualified business income can provide significant savings, but you need to navigate a complex set of thresholds and limitations that could effectively tax your business income at 29.6% if you are in the top bracket.

Transfer income from the sale of your business to a trust

Deductions for state and local tax payments are capped at $10,000. This may make you rethink the state income taxes you stand to pay upon the sale of your business.

An option to avoid state-level income taxes is to transfer ownership of your interest in a business to a trust situated in Delaware, which does not tax the income of the trust. A Delaware Incomplete Non-Grantor (DING) Trust may allow you to retain ownership of the business for gift tax purposes, while moving the income from the sale out of your home state.



This analysis is provided for illustration and discussion purposes only and does not guarantee future results. Please speak to your Fiduciary Trust contact if you have questions or would like more information. This communication is intended solely to provide general information. The information and opinions stated are as January 2020, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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