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While we do not anticipate any meaningful changes in U.S. tax laws this year, high earners should consider three ways to prepare for the Tax Cut and Jobs Act (TCJA) to sunset in 2025. The TCJA enacted in 2018 benefited many affluent taxpayers by more than doubling the gift and lifetime exemptions, slashing tax rates for the highest bracket from 39.6% to 37%, and significantly reducing the impact of the alternative minimum tax (AMT).1 Acting now may lead to potential significant savings.
We expect volatility to persist during 2024, and it is important to look closely this year at how to maximize personal income and tax planning. The Federal Reserve forecasted it would make three quarter-point cuts by the end of 2024 to lower the benchmark rate to 4.6%. Moreover, incumbents are eager for markets to prosper so they win re-election this year.
Three Considerations for Income and Tax Planning in 2024 if:
Gift and Lifetime Exemptions are Halved
The TCJA increased the federal gift and estate tax exemption from $5.5 million in 2017 to $13.6 million in 2024, so it makes sense to gift income to heirs using the lifetime exemption before it expires at the end of 2025. These looming changes offer compelling opportunities for wealth transfer and charitable giving. Donors may consider establishing a Legacy Income Trust (LIT) naming their children or other family members as income beneficiaries. Assets used to establish LIT income for beneficiaries other than a donor typically are excluded from the donor's taxable estate.
Another option is to fund wealth replacement with an irrevocable life insurance trust (ILIT), which removes the trust's assets from the grantor's taxable estate and can replace the gifted asset with a larger tax-free inheritance for family if established properly.
Tax Rates Revert to 39.6%
Consider pairing Roth IRA conversions with a Donor-Advised Fund (DAF) or a LIT. Roth conversions require investors to pay taxes on the capital gains, converting in a lower rate environment and over multiple years. Pairing a Roth IRA with a charitable giving vehicle allows you to tax-efficiently convert over time while meeting charitable giving objectives.
Another idea is to consider rebalancing or reallocating your portfolio while rates are lower.
Potential Return of AMT Reverts to pre-2018 levels
The TCJA impacted the AMT in three ways: more money was exempted from the tax for various filers; the thresholds at which the exemptions phased out rose; and certain types of deductions, such as state and local tax, which had to be added back into past calculations, were eliminated.
To compensate, we recommend: exercising incentive stock options (ISOs), which are taxable for AMT purposes if there is a substantial discount; and considering other items that may trigger AMT, such as capital gains, dividends, losses and deductions.
Bottom line: The TCJA has benefited many taxpayers, and high earners have until the end of 2025 to take advantage of these three potential savings opportunities. Taxpayers who have flexibility in the timing of their income should examine and manage long-term capital gains realization while the impact of AMT remains cushioned. We believe now is an ideal time to be forward thinking and to consider charitable giving strategies to maximize tax efficiency and take advantage of the higher gift and lifetime exemption for wealth transfer. Talk to your financial and tax planning advisor about these tax savings ideas before the TCJA expires.
1 The AMT exemption rose to $113,400 for married couples filing jointly in 2020, up from $84,500 before the enactment of the TCJA in 2017. For singles and heads of household, the exemption increased to $72,900 in 2020 from $54,300 in 2017.
Risk Considerations: As charitable giving vehicles, pooled income funds should not be treated as, and are not designed to compete with, investments made for private gain. An intention to benefit from a pooled income fund should be a significant part of the decision to contribute. The tax consequences of contributing to a pooled-income fund will vary based on individual circumstances. Prospective Donors should consult their own tax advisors. Distributions to income beneficiaries are not guaranteed by any party and are subject to investment risk.
The Firm does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature.
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