Tax advice abounds towards the end of each year as advisors try to help people minimize the taxes due the next April. Some of that advice is common sense, like making sure you paid enough taxes during the year to avoid underpayment penalties. Some of it only applies to people who can afford it, like maximizing itemizable deductions through charitable gifts. And some of it only applies to people with significant gains or losses. We’ll touch on some of these, and we’ll also look at some estate tax issues people may face.
The first and most obvious tip is to make sure you have enough tax withheld or paid during the year to avoid a large tax bill and underpayment penalties. If you’re employed, make sure your employer withholds enough income tax. If you are on social security and have additional income you may want to have taxes withheld from your social security, because the more non-social security income you have the more your social security is taxable. Underpayment penalties will not apply if you paid 90% of your current-year taxes during the year, or if you paid 100% of your previous year’s taxes during the current year.
The significant boost in the standard deduction a few years ago means that itemizing deductions does not make sense for many people. However, taxpayers with the means and the inclination can still take advantage of charitable deductions by making one large gift to a donor-advised fund this year in place of smaller gifts in later years. The donor gets the tax advantage of the large gift and still directs smaller gifts to charities as the donor wishes.
Another method charitable giving is to give away appreciated assets to charity.
That way the taxpayer avoids recognizing the gain and the charity can sell it without tax consequence. Taxpayers with large IRAs can also direct gifts of up to $100,000 from them without having to recognize the taxable income first.
Taxpayers with investment portfolios may be able to lock in lower capital gains rates now by cashing out appreciated investments, or they may be able to offset gains by selling investments that will give them a loss. Taxpayers with medical debts may be able to deduct them if they are unreimbursed and exceed 7.5% of the taxpayer’s income.
On the non-income tax side, taxpayers need to be aware of current federal estate tax laws. For 2023, any U.S. resident who dies with an estate of less than $12.92 million will not owe any federal estate tax, and that number will go up in 2024 and 2025 depending on inflation. However, in 2026 that $13 million or so of estate tax credit will be cut in half. So, persons with more than $7.5 million, and married couples with more than $13 million, should be considering strategies to lock in the benefits of the current credit amount or methods of minimizing estate taxes after 2026.
Finally, if a spouse dies before 2026, and if the couple had more than $3 million, the surviving spouse should consider filing a federal estate tax return for the deceased spouse. Filing the estate tax return will ensure that the deceased spouse’s estate tax credit will be added to the surviving spouse’s credit when they die. If the deceased spouse had a taxable estate, then the return must be filed within 9 months of the date of death or 15 months if an extension is requested on time.
Income and estate taxes can be complicated minefields, and taxpayers are well-advised to seek professional help if they have questions.
