2020 Tax Planning Tip: Minimize taxes on your estate and inherited retirement accounts.
Use your annual gift tax exclusion.
If you think that your estate will be subject to estate taxes, consider giving some of it away tax-free during your lifetime using the annual gift tax exclusion.
The annual exclusion, which is set at $15,000 each in 2020 without your gifts triggering the federal gift tax or reducing the amount that can be excluded from federal gift and estate taxes later on.
Take advantage of the temporarily high lifetime exclusion.
In addition to an annual gift tax exclusion, you also have a lifetime exclusion for federal gift and estate taxes. It is set at $11.58 million, up from $11.4 million in 2019. This means that you can currently give away up to $11.58 million during or after your lifetime without your gifts being subject to federal gift and estate taxes. And if you are married, you can jointly shelter up to $23.16 million from those taxes.
The things to keep in mind about the lifetime exclusion is that it is scheduled to decrease to $5 million, adjusted for inflation, after 2025 unless Congress changes the law in the interim. Wealthy individuals may want to use the exclusion to make tax-free gifts to their heirs now in case the exclusion amount decreases in the future.
New in 2020: Inherited a retirement account his year? Check your distribution period.
Washington recently shortened the distribution period for inherited IRAs, 401(k) plans, and other defined contribution retirement plans to 10 years for most non-spouse beneficiaries. Previously, non-spouse beneficiaries had the option to stretch the annual distributions over their life expectancy. Now, if the account owner passes away after 2019, the entire account must be distributed within 10 years.
If you are required to empty an inherited account within 10 years, please contact us to discuss how you might manage your distributions before the end of the year.
If you inherited a tax-deferred account, such as a traditional IRA, all or part of the distributions you receive will be subject to income tax. In some cases. It may be a good idea to take distributions every year in order to avoid a single, large distribution at the end of 10 years, which could push you into a higher tax bracket where you will pay a higher rate than you otherwise would have.
Not all beneficiaries are subject to the new 10-year distribution requirement. The requirement does not apply to surviving spouses, the account owner’s minor children, disabled or chronically ill individuals, and individuals who are not more than 10 years younger than the deceased account owner. It also does not apply to beneficiaries who inherited an account from someone who died prior to 2020.
We can assist you with these and other tax savings strategies so please reach out to us in Williston (802.878.1963) or Rutland (802.775.7132) for personalized advice.
This article is published in the November 2020 edition of Eye on Money. If you would like to be added to Copper Leaf Financial’s mail list for this publication please email [email protected].
*Copper Leaf Financial is an affiliated and separately registered entity.