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The Tax Man Cometh - Part 4

The Tax Man Cometh - Part 4

| December 23, 2020

Part 4 of our month-long discussion on year-end tax strategies will focus on using estate and gift tax planning. The techniques below are things that should be reviewed with your accountant as we are not tax advisors. The information provided is for education purposes only, your tax situation is unique so we encourage you to work with Grover Financial Services and your accountant to maximize your tax strategy. 

Each of the ideas below, is a service and account type Grover Financial Services offers however, to get the most out of using these techniques getting your financial team together on it is a must. That means both your advisor (us) and your accountant or tax preparer need to work in lockstep with you to execute these strategies.

Estate & Gift Tax Planning

Planning out how you leave money and to whom is a very important strategy that will not only help you manage tax liability but will also assist the beneficiaries who receive these gifts. There are a few important things you should know when it comes to your estate and the gift tax.

  1. The aggregate amount exempt from estate and gift tax per individual in 2020 is $11,580,000. 
  2. This amount reverts to half, $5,000,000 increased for inflation,on January 1, 2026, and may also be reduced sooner by the possible tax law changes we’ve talked about in previous blogs this month.
  3. A good starting point for all estate and gift tax planning is understanding your goals-based wealth plan. This means that before you “gift” any assets work with your advisor to understand whether you are in a position to gift money without affecting your goals and lifestyle needs.
  4. You can then plan to make gifts for charitable purposes, to minimize estate taxes, or to transfer future asset appreciation to your heirs.

Now that we have a handle on the preparation needed to get gifting “right”, let’s take a look at how it actually works.

Annual Exclusion Gifts

Annual exclusion gifts of up to $15,000 per recipient accumulate over time and can reduce your taxable estate. For example, when you take assets out of your estate in non-taxable gifts you can avoid the possible 40% tax at your death which is a great benefit to your overall estate and your beneficiaries. 

One thing to note is that when you make a gift to someone by check the gift is only recordable/counted when the check is actually deposited. That seems like no big deal right? Not so much! What if your kid or grandkid doesn’t deposit the $15,000 holiday check you gave them on Christmas 2020 until January 2nd 2021? This will determine the tax year that gift is attributable to. So, in this example the gift will be taxed to tax year 2021, not 2020 as you may have intended.

Payment of Tuition and Medical Expenses

What if you have children or grandchildren that have medical expenses or tuition expenses? You can help with that too and in turn positively affect your estate tax scenario. If you choose to help your family with medical expenses or tuition you can do so by paying the school or doctor directly. When you do that, special status is applied. What happens is that these payments are not considered taxable gifts. This means that they don’t eat up any of your lifetime gift and estate tax exemption.

So, why is this important? It’s important for families already making annual exclusion gifts who have used up the $11,580,000 exemption allowing you to gift more and be taxed less.

Complete Large Gifts

Completing large gifts is more important this year than ever because of the upcoming change in the Oval Office. Currently, the estate tax exemption is set to revert back to $5 million, increased by inflation, in tax year 2026. If you are able to make gifts that will hit the maximum exemption, it is in your best interest to do so now so you can preserve the larger exemption. As we’ve said before, there are many ways to execute on this idea via outright gifts or trusts, but we urge you to work with us and your accountant to insure it is done properly and that you create the highest tax-efficiency possible in your situation.

Tax Charts & Comparisons

Before we close out this month’s Edu-Blog on year-end tax strategies, we wanted to provide you with a quick summary of the income tax rates and deductions for 2020 as you prepare for filing.

2020 Income Tax Rates & Deductions

*Most elements of the 2017 Tax Cuts and Jobs Act expire December 31, 2025, and tax rates and deductions revert to 2016 law.

Again, using Grover Financial Services and your accountant simultaneously when using these strategies will keep things running as smooth as possible and potentially help you avoid mistakes that could cost you more money. 

I hope I have given you some food for thought and some things to discuss with your financial team. Have a wonderful holiday and we  will see you in January right here on our monthly Edu-Blogs where we will start the year off right with "Getting Back to Basics".

P.S. If you enjoyed what you've read here and found it beneficial, we encourage you to share it with your friends and family. I firmly believe that and educated investor is more confident, which leads to healthy finances and fewer sleepless nights. 

Source: 2020 Year-End Tax Planning