SECURE 2.0, the looming sunset of the Tax Cuts and Jobs Act (TCJA) tax provisions, and the Washington state capital gains tax are a perfect storm, making it difficult to make tax-related decisions effectively and efficiently. Some of the changes – or pending reversions – will have positive ramifications on your tax bill. Others will mean an increased tax bill for many taxpayers.

The Good
As mentioned, some provisions in SECURE 2.0 and the sunsetting of the TCJA provisions at the end of 2025 may help reduce your tax bill. Here are a few of those provisions:

The age at which an account holder must start taking required minimum distributions from their IRA and other retirement accounts has increased. It was raised to 72 prior to 2022 and is now 73. In 2033, it will increase again to 75.

The amount that can be used to make a qualified charitable distribution from an IRA to charity has increased to $105,000 from $100,000. Additionally, it is now possible to contribute up to $50,000 of that into a charitable gift annuity (CGA) or charitable trust. Given the relatively small amount, a gift to a CGA may be the more efficient option. While rates for CGAs are lower than those of commercial annuities, you receive a charitable tax benefit not available through a commercial annuity. With interest rates relatively high, now is a great time to consider this type of charitable gift.

529 plans are a popular means of gifting money to grandchildren, but there is a risk that the accounts will be over-funded, and the gifted assets may be needed for purposes other than qualified education expenses. It is now possible to roll up to $35,000 total ($7,000/year for 5 years) from a 529 plan to a Roth IRA in the name of the 529 plan beneficiary.

The $10,000 limit to deductions for state and local taxes will sunset with the TCJA at the end of 2025. Additionally, the mortgage interest deduction limit is increased to allow a deduction for interest paid on up to $1 million of principal.

The Bad

The SECURE Act eliminated the ability for non-spouse beneficiaries to take inherited IRA benefits over their lifetimes – referred to as stretch IRAs. With some exceptions, non-spouse beneficiaries of accounts whose original owner passed in 2020 or later must take full distribution of the account within ten years. If the original owner passed away after their required beginning date for distributions, annual required minimum distributions (RMDs) must be taken by the beneficiary. (This rule remains somewhat unclear, but the IRS has clarified that no penalty will be assessed for those beneficiaries who failed to take the RMDs through December 31, 2023. You should confer with your accountant if you’re in this situation.) If the original owner had not yet reached their required beginning date, RMDs are not required, but the account must be fully withdrawn in 10 years.

The reductions in income tax rates established by the TCJA will sunset at the end of next year (2025), with the top tax bracket returning to 39% from 37%.

The Ugly

Tax brackets aren’t the only TCJA provision that sunsets after 2025. The federal estate tax exemption, currently at $13.61 million per individual and $27.22 million for married couples, will revert to roughly $7.5 million adjusted for inflation. However, it is possible to utilize your exemption now. Treasury has confirmed that there will be no claw backs of gifts made under the current exemption amount. If you have an estate that may be over that lower exemption amount in the future, you should consider making irrevocable gifts now. If you’re not certain what the value of your future estate might be, a financial plan can estimate your net worth at any point in the future.

A straightforward way to remove assets from your estate is by making annual exclusion gifts. Each year, an individual can gift up to $18,000 (for 2024; the amount is adjusted for inflation annually) outright to another individual without filing a gift tax return. A married couple with two married children can gift each couple up to $72,000 a year. Over twenty years, that’s roughly $2,880,000 out of their estate, potentially saving 40% (the current top estate tax rate) of that amount or approximately $1,152,000 in estate taxes.

There are many other vehicles for transferring assets out of your estate now, some of which may allow you to maintain access to the income produced by those assets. Here are just a few possibilities:

Spousal lifetime access trusts (SLATs) are one option for locking in the current exemption amount. By making an irrevocable gift to your spouse, you can utilize and protect your current deduction. However, SLATs may have undesirable consequences in the event of the gifted spouses’ death or divorce, so you’ll need to talk the pros and cons through with an estate planning attorney with experience in that area.

Charitable trusts are another option for removing assets from your estate and receiving a current charitable tax deduction. Charitable lead trusts pay income to charity during the term of the trust with the remainder going to your heirs. Charitable remainder trusts, on the other hand, provide an income stream to your heirs, and the remainder goes to charity.

It’s important to work with experienced advisors, such as an estate planning attorney and accountant with estate and trust experience, along with your financial advisor to determine the best approach for your situation. If you haven’t already had these conversations, you should schedule them as soon as possible, as some of these strategies take months to implement and may involve other experts who will be increasingly busy as the end of 2025 approaches.

The Opportunities

Your Fulcrum team is here to help you keep an eye out for potential tax issues and opportunities – and engage with your other professional advisors to determine the best approach to maximize the good and navigate the bad and the ugly.