|Keep in mind that gifts of long-term appreciated securities to qualified public charities (including donor-advised funds) are limited to 30% of adjusted gross income (AGI) while similar gifts to a private foundation are limited to 20% of AGI. Charitable gifts in excess of the AGI limits result in a charitable carryforward which can be used over the next five years.
Satisfy Required Minimum Distributions using the IRA Charitable Rollover
The SECURE Act raised the beginning age for required minimum distributions (RMDs) to 72, from age 70½, previously; however, it did not adjust the age 70½ requirement for taxpayer eligibility to make a Qualified Charitable Distribution (QCD).
Under this provision, a taxpayer may gift up to $100,000 each year from an IRA to qualified 501(c)(3) charitable organizations (donor-advised funds, private foundations and supporting organizations are excluded). A qualified charitable distribution neither counts as an itemized deduction nor as taxable income, though it does count towards satisfying the RMD for that year.
This strategy may be beneficial for charitably inclined individuals who receive a greater tax benefit from the increased standard deduction rather than itemized deductions.
Consider a Roth Conversion
With global equities down sharply for the year and with income tax rates at historically favorable levels, the timing may be opportune for some individuals to execute a Roth conversion.
Individuals who believe their future tax rate might be higher than their current tax rate might consider converting a portion – or all – of existing Traditional IRA assets to a Roth IRA. Assuming the Traditional IRAs have no basis, the amount of the conversion is treated as taxable income; in exchange, the Roth IRA grows tax-free with qualified distributions also treated as tax-free.
Individuals with notable assets but with lower-than-usual income in 2022 might consider this strategy, as it allows the taxpayer to essentially pay a reduced rate on the conversion while taxable income is low.
This strategy can be particularly beneficial for individuals with a taxable estate, as the tax cost of the conversion effectively reduces the size of the estate, while the named beneficiaries one day receive a very tax-favorable asset, compared to inheriting a Traditional IRA. In some cases, high net worth individuals might consider pairing a Roth conversion with accelerated charitable giving, as the charitable deduction will help to offset the effective tax cost of the conversion.
Note that there are a number of factors (time horizon, overall net worth, tax bracket, etc.) to evaluate to determine whether a Roth conversion might ultimately be beneficial.
Utilize Annual Exclusion Gifts
Individuals are allowed to make “annual exclusion gifts” which do not have gift tax implications. In 2022, the annual gift tax exemption is $16,000 per donee (increasing to $17,000 in 2023).
For high net worth individuals with – or likely to one day have – a taxable estate, utilizing annual exclusion gifts is an effective way to reduce one’s taxable estate while also helping loved ones.
As an example, consider Mike and Mary Jones – a very wealthy couple with two married children (four spouses total) and five grandchildren. In 2022, the Joneses, as a couple, could gift $32,000 to each of the nine individuals for a combined total of $288,000, without such gifts counting against their lifetime gift tax exemption. In making these annual exclusion gifts each year, the Joneses are able to carve out a notable portion from their taxable estate.
It is also worth noting that medical payments made directly to a medical provider do not count as taxable gifts. Furthermore, tuition payments made directly to an educational institution do not constitute taxable gifts. Tuition is narrowly defined as the cost for enrollment; it does not include books, supplies, or room and board.
Utilize the Lifetime Gift Tax Exemption
The Tax Cuts and Jobs Act (TCJA), which was passed in December 2017, approximately doubled the estate exemption from $5.49 million per person in 2017 to $11.18 million per person in 2018. The lifetime gift tax exemption currently stands at $12.06 million per person (and will jump to $12.92 million per person in 2023), with a top federal estate tax rate of 40%.
The increased exemption amounts, under TCJA, are scheduled to run through 2025, after which the basic exclusion amount (BEA) is set to revert to the 2017 level of $5 million per person, plus inflation adjustments.
In recent years, the Biden administration and certain congressional leaders have proposed, albeit unsuccessfully, to lower the exemption amount.
While the elevated exemption is scheduled to remain in place through 2025, high net worth individuals should not lose perspective of the unique planning opportunity to get additional assets out of one’s taxable estate.