Year-End Gift, Tax, Retirement, & Estate Planning

As another year-end approaches, tasks on your financial “to-do” list should include a reexamination of your current gifting, retirement, and estate planning and act on key year-end planning opportunities. A review of your current estate planning and current financial position can help you ensure that you are taking full advantage of all tax-saving opportunities and available exemptions, including annual gift-giving opportunities.

Some of the most common year-end estate planning considerations include:

• Annual gift giving;
• Charitable giving;
• Retirement planning;
• Income tax planning;
• Estate planning;
• Reexamining your lifetime unified credit exemption;
• Retirement required minimum distribution (RMD) planning;
• Business transition planning.

Year-End Gift Giving

The end of the calendar year is the most common time to make financial gifts to family members. This is especially true for individuals and married couples with estates valued in excess of the federal estate tax exemption. For tax year 2023, an individual taxpayer may gift to another single individual up to $17,000 without the need to file a federal gift tax return. A married couple may gift a combined $34,000 to a single gift recipient. The annual gift tax exemption is expected to increase to $18,000 effective January 1, 2024. Any unused annual gift tax exemptions do not carry forward, so it is a “use it or lose it” proposition. For certain taxpayers, making the maximum use of annual exclusion gifts can be extremely beneficial, often removing dollars from a taxable estate that may otherwise be one day taxed at up to 40% at the donor’s death. Furthermore, these gifts may be made outright to the donee, to certain trusts, to custodial accounts for minors, or to certain educational accounts (such as Code § 529 plans).

Other Gifts & Charitable Contributions

Another often overlooked method of gifting that will reduce the donor’s overall estate, without reducing their ability to make the annual gift tax exclusion gift of $17,000, is to pay their children’s, grandchildren’s, or other donee’s medical or tuition expenses. Qualifying medical and tuition expenses do not count against the donor’s annual exclusion gift amount or lifetime exclusion, provided those payments are made directly to the health care provider or the educational institution. Year-end is also the time to reflect on charitable contributions. For example, if you have not yet taken the entirety of your required minimum distributions from a qualified retirement plan (Code § 401(k) plan or IRA), you may wish to consider directing the plan custodian to send the RMD payments directly to a charity you wish to support. While you do not get a charitable deduction for the donation, you do not get taxed on the RMD as you would if you received the distribution outright. This may prove helpful if you do not itemize your deductions, or if your itemized deductions do not give you much benefit from your overall charitable deductions. You can avoid paying income tax on otherwise taxable income while still supporting a charity of your choice.

Year-End Estate Planning

You should review your estate planning annually. Confirm that your fiduciary appointments are current (the persons you have appointed as executor, trustee, power of attorney, etc.). Have there been any significant changes to your assets? Have your beneficiaries changed, or have they experienced a change in circumstances?

Have there been any significant changes in the laws impacting your estate plan? State and federal laws impacting estate planning frequently change. Therefore, periodic reviews of your current planning and new opportunities should be periodically discussed with your estate planning attorney and other advisors.

Year-End Tax Planning

Another year-end consideration involves your tax planning. Discuss with your tax advisor and estate planning attorney and be aware of any state and federal tax law changes that may impact your exposure to tax liability, as well as evaluate opportunities to utilize any current year losses or carry forward losses from prior tax years.

In addition, other important year-end tax planning considerations include:

• Required minimum distributions: RMDs (with limited exceptions) must begin when a plan participant attains age 73. Distributions are considered ordinary income and often ratchet the taxpayer into a higher marginal tax bracket. Failure to take the RMD, in full or in part, can result in a penalty equal to 50% of the RMD not taken. Therefore, you should take whatever steps are necessary to ensure that you receive your RMD payment by December 31st.
• Maximize Retirement Plan Contributions: Consider making the maximum contributions towards your retirement plans. In 2023 $22,500 may be contributed to certain employer-sponsored plans (such as Code § 401(k) plans)., In addition, participants aged 50 and above can contribute an additional $7,500 pre-tax catch-up contribution. For IRAs, the 2023 contribution limits are $6,500 with an available $1,000 catch-up contribution for those over age 50.
• Tax Loss Harvesting is an effective way to utilize losses in an investment portfolio, thereby offsetting the realization of capital gains in a tax year. Capital gains are generally taxed at 20%. Tax loss harvesting also offers an opportunity to diversify a portfolio otherwise concentrated in a single investment or sector of investments.
• Roth IRA conversions can be used to convert a traditional or employer-sponsored IRA to a Roth IRA to take advantage of a tax-deferred plan by paying an income tax at the time of the conversion rather than in future years when funds are withdrawn. Depressed markets can provide an opportune time to convert to a Roth as the amount subject to tax will be lower. However, there are other caveats to consider when converting to a Roth IRA, including tax implications which are best discussed with your estate planning attorney or tax advisor.

If you have questions about your estate plan or any year-end gift or tax planning transactions that can be integrated into your plan, our attorneys at North Carolina Estate Planning and Fiduciary Law are well-prepared to assist you in navigating the complexities of estate planning and year-end transactions. We can help you make informed decisions regarding the estate planning and financial strategies that best suit your unique situation. Schedule a confidential consultation by calling us at (704) 248-6325 or request an appointment online.