The results of the recent mid-term elections mean we are unlikely to see significant tax changes in the near future, which should permit year-end planning with a relatively high degree of confidence. With 2023 fast approaching, individuals should review opportunities for year-end planning, including the following.
Make Annual Exclusion Gifts
In 2022, individuals can give up to $16,000 each to an unlimited number of recipients without reducing their lifetime gift or estate tax exemptions, paying gift tax or filing a federal gift tax return. Married couples can double the annual exclusion amount (to $32,000 per recipient) by electing on a gift tax return to “split” gifts. The annual exclusion is a “use it or lose it” proposition, however, since any unused 2022 annual exclusion will not carry over to 2023.
To qualify for the annual exclusion, a gift must be of a “present interest,” so the donor should make the gift directly to the recipient or, if the gift is made to a trust, the trust must provide “Crummey” withdrawal powers that allow the intended beneficiary to withdraw an amount equal to the annual exclusion. A notification letter should generally be sent to the beneficiary. Trusts for grandchildren must be designed to qualify for the generation-skipping transfer (GST) tax exemption annual exclusion, or gifts to the trust will use a portion of the donor’s lifetime GST tax exemption. Donors also should be aware that gifts made by check must be deposited by the recipient before the end of the year to qualify for the 2022 annual exclusion.
Consider Gifts Using Lifetime Exemption
In addition to annual exclusion gifts, each U.S. individual has a federal gift and estate tax exemption, which is currently $12.06 million and scheduled to increase to $12.92 million in 2023. Any exemption not used to shelter gifts made during life is available at death to shelter assets from federal estate taxes; however, unless the tax laws change, this exemption will drop to $5 million (adjusted for inflation) in 2026. Those individuals who have sufficient assets and a desire to make lifetime gifts may want consider, sooner rather than later, how to maximize their use of this temporarily higher gifting capacity.
Manage Capital Gains
Generally, capital gains and losses incurred in the same tax year will offset each other. Individuals should review their investment portfolios to determine whether they want to “harvest” capital losses to offset capital gains realized in 2022 or accelerate the realization of gains that may be absorbed by realized losses. But be aware of the “wash sale rules,” which disallow the tax loss on the sale of a security if a “substantially identical” security is repurchased within a 30-day window before or after the sale.
Review Charitable Giving
Individuals who make regular charitable gifts may want to plan their donations to optimize the potential charitable deduction, such as bunching the donations into an expected high tax year. Consideration also should be given to the types of assets donated. For example, making a charitable donation of publicly traded stock that has a low basis (rather than selling it and donating the proceeds) can give the donor a charitable deduction equal to the fair market value of the stock at the time of donation (subject to applicable limitations) and eliminate the gain recognition that generally would be triggered upon the asset’s sale.
In addition to charitable donations, individuals may wish to accelerate or delay other itemized deductions (such as medical costs and certain interest expenses), depending on their tax outlook for this year and next. Bundling available itemized deductions into a high tax year can help manage anticipated income tax liabilities.
Individuals who must take required minimum distributions (RMDs) from qualified retirement plans and traditional IRAs should do so by Dec. 31 to avoid penalties. Note that charitably inclined individuals who have not yet taken 2022 RMDs (or who have attained age 70 1/2 even if they are not required to take RMDs) also may wish to consider making a qualified charitable distribution (QCD) from their traditional IRAs directly to one or more eligible public charities (not a donor advised fund or private foundation). QCDs, up to $100,000 total per year, do not count as taxable income and cannot be taken as charitable deductions but may count toward satisfaction of an individual’s RMD.