Reading emails sent by the IRS isn’t exactly keep-you-up-at-night fare.
But there’s something about reading about scammers that I find oddly satisfying.
And they (the IRS) has continued to send out mass warnings in their “Dirty Dozen” series, shedding light on the shady tricks scammers try to pull. They include everything from fake fuel tax credit claims and imaginary charities (yikes) to shady tax preparers who make a living off of over-promising — and then ghosting their victims.
That scam works — having a tax pro in your corner who knows their stuff AND has your best interest in mind is tough to find these days. Not only because you don’t want to get scammed, but because the tax code is constantly evolving. Frankly, it’s a lot to keep up with — even for us. Let alone for those who don’t do this stuff for a living.
(It’s still fundamentally amazing to me that the government thinks it’s reasonable for Orange County, California taxpayers to fulfill their duties with so much complexity involved in the tax code … but this is why we are in business, isn’t it?)
But on top of all the complexity, you shouldn’t have to be constantly on your toes, also worrying if you’re going to be scammed.
If you think you may have been the victim of a scam recently, or have questions about anything, you know where to find me: 866-282-3127
But moving on from all that, here’s the big picture on two little-understood taxes that strongly affect your legacy and the impact you make in the world: the gift tax and the estate tax.
Understanding the Gift Tax and Estate Tax
“Give until it hurts.” – Mother Teresa
Exemption limits for gifts and estates (how much you can give away before paying taxes on the money) have been a major break for wealthy Orange County, California taxpayers for a while now.
That may change soon.
Wealthy folks benefited especially from breaks on estate taxes from 2017’s Tax Cuts and Jobs Act, but some provisions of the TCJA changes — including the deal on estate taxes — may disappear in 2026, meaning you’ll have to start paying federal taxes on estates that are worth much less when you leave them to heirs. We say “may” because it’s hard to know what a politically divided Congress will (or won’t) do.
But here’s what we do know about the gift and estate taxes.
The gift tax
This is the simpler tax we’re talking about. This year, you can give up to 17 grand to someone before having to pay tax. You and your consenting spouse can give twice that in what’s known as a “split gift” (you need to file IRS Form 709 if you do this). These caps have increased by 1,000 dollars a year, steadily and surely, over the past decade. You (the donor) pay gift tax over the cap, and you cannot deduct the amount on your income tax return.
And that amount is per recipient — so you can really spread the dough around before Uncle Sam gets involved.
“Gifts” can also include property and other items you give without expecting to get something of at least equal value in return, including interest-free or reduced-interest loans. But not everything you give constitutes a “gift” for taxes. Some example exceptions include tuition or medical expenses.
The estate tax
The fair market value of all your possessions at death — not necessarily what you paid for them — is your “Gross Estate.” Deductions to this may include mortgages and other debts, estate administration expenses, and property that passes to surviving spouses and qualified charities, among other things. What’s left over incurs or is exempt from the federal estate tax, which runs about 18% to 40%, depending on what remains after the exemption.
The future estate tax exemption is tricker to plan for right now. This year, you can leave an estate worth 12.92 million dollars before federal estate tax kicks in (unless you leave it to your spouse, then there’s no federal tax or limit).
To understand the potential impact of changes to that amount, let’s glance again at 2017: the last year before the TCJA and the year when the most your estate could be worth was 5.49 million before you had to pay taxes if you left it to heirs at your death. The next year, that limit more than doubled to 11.18 million, and it’s been going up every year since.
…And will continue to do so until January 1, 2026, when without action from Congress this part of the TCJA will end (or “sunset”). The new exemption after that? Back to that 5.49 million per person, as it stands right now. Not great news, unless you plan to die before 2026 …
Another worry, on top of gift and estate taxes: The top federal marginal tax rate will (again, without action on Capitol Hill) pop back to 39.6%.
Making a plan
Given a divided Congress… who knows? Either side could prevail over the coming 30 months or so, winning either preservation of the TCJA tax rates or their rapid curtailment. Planning’s never a certain business, of course, but planning for Orange County, California estate taxes now is truly uncertain.
Here are some possible moves:
Trusts: Spousal lifetime access trusts, among others, can shield income from estate taxes by basically taking assets out of your name and reserving them for a beneficiary. These get complex depending on the type of trust — check with us.
Regular use of gifts. The gift tax exemption is likely to grow year after year. Giving each of your intended heirs the maximum amount every 12 months will whittle the eventually taxable portion of your estate (even though the lifetime gift tax exemption is the same as the estate tax exemption).
Convert to a Roth. If you’re planning to leave a traditional individual retirement account, converting it to a Roth IRA can save the beneficiaries from future taxes, as there are no taxes on withdrawals from a Roth. You will have to pay income tax now on the converted amount — but again, if you’re in the top bracket, your tax rate will increase (as it stands now) in the future if that provision of the TCJA is allowed to sunset.
What you give to others and leave behind for those you care about are some of the biggest decisions of your life. Let’s do it in a way that makes the most impact while avoiding the most taxes.
Rooting for you,