If your investments have fluctuated wildly this year, you may have already recognized some significant gains and losses. But nothing is decided tax-wise until year end when the final results of your trades will reveal your 2023 tax situation. Here’s what you need to know to avoid tax surprises.

Tax-favored retirement accounts and taxable accounts

If you’ve had wild swings in the value of investments held in a tax-favored 401(k), traditional IRA, Roth IRA or self-employed SEP account, there’s no current tax impact. While these changes affect your account value, they have no tax consequences until you finally start taking withdrawals. At that point, the size of your balance(s) will affect your tax bills. If you have investments in a Roth IRA, qualified withdrawals taken after age 59½ can be federal-income-tax-free.

With taxable accounts, your cumulative gains and losses from executed trades during the year are what matter. Unrealized gains and losses don’t affect your tax bill.

Overall loss for 2023

If your losses for the year exceed your gains, you have a net capital loss. To determine and apply the loss:

1. Divide your gains and losses into short-term gains and losses from investments held for one year or less and long-term gains and losses from investments held for more than one year.
   • If your short-term losses exceed your short- and long-term gains, you have a net short-term capital loss for the year.
   • If your long-term losses exceed the total of your long- and short-term gains, you have a net long-term capital loss for the year.
2. Claim your allowable net capital loss deduction of up $3,000 ($1,500 if you use married filing separate status).
3. Carry over any remaining net short-term or long-term capital loss after Step 2 to next year where it can be used to offset capital gains in 2024 and beyond.

Overall gain for 2023

If your gains for the year exceed your losses, you have a net capital gain. To figure out the gain:

• Divide your gains and losses into short-term gains and losses from investments held for one year or less and long-term gains and losses from investments held for more than one year.
  • If your short-term gains exceed the total of your short- and long-term losses, you have a net short-term capital gain for the year.
  • If your long-term gains exceed the total of your long- and short-term losses, you have a net long-term capital gain for the year.

Net short-term and long-term gain

A net short-term capital gain is taxed at your regular federal income tax rate, which can be up to 37%. You may also owe the 3.8% net investment income tax (NIIT) (see below) and state income tax, too.

A net long-term capital gain (LTCG) is taxed at the lower federal capital gain tax rates of 0%, 15%, and 20%. Most individuals pay 15%. High-income folks will owe the maximum 20% rate on the lesser of: 1) net LTCG or 2) the excess of taxable income, including any net LTCG, over the applicable threshold. For 2023, the thresholds are $553,850 for married joint-filers, $492,300 for singles and $523,050 for heads of households. You may also owe the NIIT and state income tax, too.

Watch out for the NIIT

The 3.8% NIIT hits the lesser of your net investment income, including capital gains, or the amount by which your modified adjusted gross income exceeds the applicable threshold. The thresholds are:

• $250,000 for married joint-filers,
• $200,000 for singles and heads of households, and
• $125,000 for married individuals filing separate.

Year end is still months away

As explained earlier, your tax results for 2023 are up in the air until all the gains and losses from trades executed during the year are tallied up. If you have questions or want more information, consult with us.

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Many homeowners across the country have seen their home values increase in recent years. According to the National Association of Realtors, the median price of existing homes sold in July of 2023 rose 1.9% over July of 2022 after a couple years of much higher increases. The median home price was $467,500 in the Northeast, $304,600 in the Midwest, $366,200 in the South and $610,500 in the West.

Be aware of the tax implications if you’re selling your home or you sold one in 2023. You may owe capital gains tax and net investment income tax (NIIT).

You can exclude a large chunk

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.

To qualify for the exclusion, you must meet these tests:

1. You must have owned the property for at least two years during the five-year period ending on the sale date.
2. You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

The gain above the exclusion amount

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss, which you can’t do on a principal residence.

The NIIT may be due for some taxpayers

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.

However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

• Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use.
• You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.

As you can see, depending on your home sale profit and your income, some or all of the gain may be tax-free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales.

© 2023

Portability helps minimize federal gift and estate tax by allowing a surviving spouse to use a deceased spouse’s unused gift and estate tax exemption amount. Currently, the exemption is $12.92 million, but it’s scheduled to return to an inflation-adjusted $5 million on January 1, 2026.

Unfortunately, portability isn’t automatically available; it requires the deceased spouse’s executor to make a portability election on a timely filed estate tax return (Form 706). And many executors fail to make the election because the estate isn’t liable for estate tax and, therefore, isn’t required to file a return.

The numbers don’t lie

When there’s a surviving spouse, estates that aren’t required to file an estate tax return should consider filing one for the sole purpose of electing portability. The benefits can be significant, as the following example illustrates:

Bob and Carol are married. Bob dies in 2023, with an estate valued at $3.92 million, so his unused exemption is $9 million. His estate doesn’t owe estate tax, so it doesn’t file an estate tax return.

Carol dies in 2026, with an estate valued at $15 million. For this example, let’s say the exemption amount in 2026 is $6 million. Because the exemption has dropped to $6 million, her federal estate tax liability is $3.6 million [40% x ($15 million – $6 million)].

Had Bob’s estate elected portability, Carol could have added his $9 million unused exemption to her own for a total exemption of $15 million, reducing the estate tax liability on her estate to zero. Note that, by electing portability, Bob’s estate would have locked in the unused exemption amount in the year of his death, which wouldn’t be affected by the reduction in the exemption amount in 2026.

Take action before time expires

If your spouse died within the last several years and you anticipate that your estate will owe estate tax, consider having your spouse’s estate file an estate tax return to elect portability. Ordinarily, an estate tax return is due within nine months after death (15 months with an extension), but a return solely for purposes of making a portability election can usually be filed up to five years after death. Contact us with any questions regarding portability.

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Granted, a QTIP trust is an odd sounding name for an estate planning technique. Nevertheless, it can be a valuable strategy, especially if you’re currently in a second marriage. The QTIP moniker is an acronym for the technical term of “qualified terminable interest property.” Essentially, the trust provides future security for both a surviving spouse and children from a prior marriage, while retaining estate planning flexibility.

Notably, any federal estate tax due on QTIP trust assets is postponed until the death of the surviving spouse. At that time, his or her gift and estate tax exemption may shelter the remaining trust assets from tax.

A QTIP trust in action

Generally, a QTIP trust is created by the wealthier spouse. When the grantor dies, the surviving spouse assumes a “life estate” in the trust’s assets. This provides the surviving spouse with the right to receive income from the trust, but he or she doesn’t have ownership rights — thus, he or she can’t sell or transfer the assets. Upon the death of the surviving spouse, the assets are passed to the final beneficiaries, who may be the children from the grantor’s prior marriage.

Accordingly, you must designate the beneficiaries of the QTIP trust, as well as the trustee to manage the assets. This could be your spouse, adult child, close friend, or, as is often the case, a third-party professional.

Estate tax ramifications

A QTIP trust is designed to combine the estate tax benefits of the unlimited marital deduction and the gift and estate tax exemption. When you create the trust and provide a life estate to your spouse, the assets are sheltered from tax by the unlimited marital deduction after your death.

After your spouse passes, assets in the QTIP trust are subject to federal estate tax. However, the $12.92 million (for 2023) gift and estate tax exemption will likely shelter most estates from estate tax liability.

Planning flexibility

A QTIP trust can provide added flexibility to your estate plan. For example, at the time of your death, your family’s situation or the estate tax laws may have changed. The executor of your will can choose to not implement a QTIP trust if that makes the most sense. Otherwise, the executor makes a QTIP trust election on a federal estate tax return. (It’s also possible to make a partial QTIP election.)

Once the election is made and the estate tax return is filed within nine months after the death (plus an additional six months if the executor obtains an extension), it’s irrevocable. There’s no going back.

Right for your plan?

If you wish to provide for your spouse after your death, but at the same time ensure that your children ultimately receive the inheritance you want to provide for them, a QTIP trust might be the preferred option. Contact us to learn if a QTIP trust is right for you.

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It’s not uncommon for employees to grumble about having to attend too many meetings. Sometimes they have a point; an excessive number of meetings can become a problem at some companies. However, there’s one kind of meeting that business owners and their leadership teams should never scrimp on: strategic planning.

That doesn’t mean you need to have one every week, or even every month. But regularly scheduled strategic planning meetings are critical for establishing, reviewing and, if necessary, adjusting your company’s short- and long-term objectives. Here are four best practices for running effective meetings:

1. Set a focused agenda. Every meeting should have an agenda that’s relevant to strategic planning — and only strategic planning. Allocate an appropriate amount of time for each item so that the meeting is neither too long nor too short.

Before the meeting, distribute a document showing who’ll be presenting on each agenda topic. The idea is to create a “no surprises” atmosphere in which attendees know what to expect and can thereby think about the topics in advance and bring their best ideas and feedback.

2. Lay down rules as necessary. Depending on your company’s culture, you may want to state some upfront rules — either in writing beforehand or by announcement at the beginning of the meeting. Address the importance of timely attendance, professional decorum and constructive criticism. Emphasize that there are no dumb questions or bad ideas.

Every business may not need to do this, but meetings that become hostile or chaotic with personal conflicts or “side chatter” can undermine the efficacy of strategic planning. Also consider whether to identify conflict resolution methods that participants must agree to follow if particularly heated arguments arise.

3. Name (or engage) a facilitator. A facilitator should oversee the meeting. This individual is ultimately responsible for starting and ending on time, transitioning from one agenda item to the next, and enforcing the stated rules. Ideally, a facilitator also needs to be good at motivating participation from everyone and encouraging a positive, productive atmosphere.

If no one at your company feels up to the task, you could engage an outside consultant. Although you’ll need to vet the person carefully and weigh the financial cost, a skilled professional facilitator can make a big difference.

4. Keep minutes. Recording the minutes of every strategic planning meeting is essential. An official record will document what took place and which decisions, if any, were made. It will also serve as a log of potentially valuable ideas or future agenda items.

In addition, accurate meeting minutes curtail miscommunications and prevent memory lapses of what was said and by whom. If no record is kept, people’s memories may differ about the conclusions reached, and disagreements could arise about where your business is striving to go.

© 2023

The need for a will as a key component of your estate plan may seem obvious, but you’d be surprised by the number of people — even affluent individuals — who don’t have one. In the case of the legendary “Queen of Soul” Aretha Franklin, she had more than one, which after her death led to confusion, pain and, ultimately, a court trial among her surviving family members.

Indeed, a Michigan court recently ruled that a separate, handwritten will dated 2014, found in between couch cushions superseded a different document, dated 2010, that was found around the same time.

In any case, when it comes to your last will and testament, you should only have an original, signed document. This should be the case even if a revocable trust — sometimes called a “living trust” — is part of your estate plan.

Living trust vs. a will

True, revocable trusts are designed to avoid probate and distribute your wealth quickly and efficiently according to your wishes. But even if you have a well-crafted revocable trust, a will serves several important purposes, including:

• Appointing an executor or personal representative you trust to oversee your estate, rather than leaving the decision to a court,
• Naming a guardian of your choosing, rather than a court-appointed guardian, for your minor children, and
• Ensuring that assets not held in the trust are distributed among your heirs according to your wishes rather than a formula prescribed by state law.

The last point is important, because for a revocable trust to be effective, assets must be titled in the name of the trust. It’s not unusual for people to acquire new assets and put off transferring them to their trusts or they simply forget to do so. To ensure that these assets are distributed according to your wishes rather than a formula mandated by state law, consider having a “pour-over” will. It can facilitate the transfer of assets titled in your name to your revocable trust.

Although assets that pass through a pour-over will must go through probate, that result is preferable to not having a will. Without a will, the assets would be distributed according to your state’s intestate succession laws rather than the provisions of your estate plan.

Reason for an original will

Many people mistakenly believe that a photocopy of a signed will is sufficient. In fact, most states require that a deceased’s original will be filed with the county clerk and, if probate is necessary, presented to the probate court. If your family or executor can’t find your original will, there’s a presumption in most states that you destroyed it with the intent to revoke it. That means the court will generally administer your estate as if you died without a will.

It’s possible to overcome this presumption — for example, if all interested parties agree that a signed copy reflects your wishes, they may be able to convince a court to admit it. But to avoid costly, time-consuming legal headaches, it’s best to ensure that your family members can locate your original will when they need it.

Please don’t hesitate to contact us if you have questions about your will or overall estate plan.

© 2023

Setting up an investment account for your minor child can be a tax-efficient way of saving for college or other expenses. And one of the simplest ways to invest on your child’s behalf is to open a custodial account under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).

These accounts — which are available through banks, brokerage firms, mutual fund companies and other financial institutions — are owned by the child but managed by the parent or another adult until the child reaches the age of majority (usually age 18 or 21).

Custodial accounts can be a convenient way to transfer assets to a minor without the expense and time involved in setting up a trust, but bear in mind that they have downsides, too. Let’s take a closer look at the pros and cons.

Pros

Convenience and efficiency. Establishing a custodial account is like opening a bank account. So it’s quicker, easier and cheaper to set up and maintain than more complex vehicles, such as trusts.

Flexibility. Unlike some savings vehicles, such as Coverdell Education Savings Accounts (ESAs), anyone can contribute to a custodial account, regardless of their income level. In addition, there are no contribution limits. Also, there are no restrictions on how the money is spent. In contrast, funds invested in ESAs and 529 plans must be spent on qualified education expenses, subject to stiff penalties on unqualified expenditures. (However, beginning in 2024, limited amounts held in a 529 plan may be rolled over to a Roth IRA for certain beneficiaries.)

Variety of investment options. Custodial accounts typically offer a broad range of investment options, including most stocks, bonds, mutual funds and insurance-related investments. UTMA accounts may offer even more options, such as real estate or collectibles. ESAs and 529 plans often have more limited investment options.

Estate and income tax benefits. Gifts to a custodial account reduce the size of your taxable estate. Keep in mind, however, that gifts in excess of the $17,000 annual exclusion ($34,000 for married couples) may trigger gift taxes or may tap some of your lifetime gift and estate tax exemption. Contributions to custodial accounts can also save income taxes: A child’s unearned income up to $2,500 per year is usually taxed at low rates (income above that threshold is taxed at the parents’ marginal rate).

Cons

Other vehicles offer greater tax benefits. Although custodial accounts can reduce taxes, ESAs and 529 plans allow earnings to grow on a tax-deferred basis, and withdrawals are tax-free provided they’re spent on qualified education expenses. In addition, 529 plans allow you to accelerate five years of annual exclusion gifts and make a single tax-free contribution of up to $85,000 for 2023 ($170,000 for married couples making joint gifts).

Impact on financial aid. As the child’s property, a custodial account can have a negative impact on financial aid eligibility. ESAs and 529 plans are usually treated as the parents’ assets, which have less impact on financial aid eligibility.

Loss of control. After the child reaches the age of majority, he or she gains full control over the assets and can use them as he or she sees fit. If you wish to retain control longer, you’re better off with an ESA, a 529 plan or a trust.

Inability to change beneficiaries. Once you’ve established a custodial account for a child, you can’t change beneficiaries down the road. With an ESA or parent-owned 529 plan, however, you can name a new beneficiary if your needs change and certain requirements are met.

Weigh your options

A custodial account can be an effective savings tool, but it’s important to understand the pros and cons. We can help you determine which tool or combination of tools is right for you given your financial circumstances and investment goals.

© 2023

With the escalating cost of health care, many people are looking for a more cost-effective way to pay for it. For eligible individuals, a Health Savings Account (HSA) offers a tax-favorable way to set aside funds (or have an employer do so) to meet future medical needs. Here are four tax benefits:

1. Contributions made to an HSA are deductible, within limits,
2. Earnings on the funds in the HSA aren’t taxed,
3. Contributions your employer makes aren’t taxed to you, and
4. Distributions from the HSA to cover qualified medical expenses aren’t taxed.

Eligibility

To be eligible for an HSA, you must be covered by a “high deductible health plan.” For 2023, a high deductible health plan is one with an annual deductible of at least $1,500 for self-only coverage, or at least $3,000 for family coverage. (These amounts are scheduled to increase to $1,600 and $3,200 for 2024.)

For self-only coverage, the 2023 limit on deductible contributions is $3,850. For family coverage, the 2023 limit on deductible contributions is $7,750. (These amounts are scheduled to increase to $4,150 and $8,300 for 2024.) Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2023 can’t exceed $7,500 for self-only coverage or $15,000 for family coverage ($8,050 and $16,100 for 2024).

An individual (and the individual’s covered spouse) who has reached age 55 before the close of the year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2023 and 2024 of up to $1,000 per year.

HSAs may be established by, or on behalf of, any eligible individual.

Deduction limits

You can deduct contributions to an HSA for the year up to the total of your monthly limitation for the months you were eligible. For 2023, the monthly limitation on deductible contributions for a person with self-only coverage is 1/12 of $3,850. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,750. Thus, deductible contributions aren’t limited by the amount of the annual deductible under the high deductible health plan.

Also, taxpayers who are eligible individuals on the first day of the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.

However, if an individual is enrolled in Medicare, he or she is no longer eligible under the HSA rules and contributions to an HSA can no longer be made.

On a once-only basis, taxpayers can withdraw funds from an IRA and transfer them tax-free to an HSA. The amount transferred can be up to the maximum deductible HSA contribution for the type of coverage (individual or family) in effect at the transfer time. The amount transferred is excluded from gross income and isn’t subject to the 10% early withdrawal penalty.

Taking distributions

HSA distributions to cover an eligible individual’s qualified medical expenses (or those of his or her spouse or dependents, if covered) aren’t taxed. Qualified medical expenses for these purposes generally means those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65 or in the event of death or disability.

As you can see, an HSA offers a very flexible option for providing health care coverage, but the rules are somewhat complicated. Contact us if you have questions.

© 2023

Some assets pose more of a challenge than others when it comes to valuing and accounting for them in an estate plan. Take, for instance, an art collection. If you possess paintings, sculptures or other pieces of art, they may represent a significant portion of your estate. Here are a few options available to address an art collection in your estate plan.

Sell, bequest or donate

Generally, there are three options for handling your pieces of art in your estate plan: Sell them, bequest them to your loved ones, or donate them to a museum or charity. Let’s take a closer look at each option:

1. If you opt to sell, keep in mind that long-term capital gains on artwork and other “collectibles” are taxed at a top rate of 28%, compared with 20% for other types of assets. Rather than selling pieces of art during your lifetime, it may be preferable to include them in your estate to take advantage of the stepped-up basis. That higher basis will allow your heirs to reduce or even eliminate the 28% tax. For example, you might leave the collection to a trust and instruct the trustee to sell it and invest or distribute the proceeds for the benefit of your loved ones.
2. If you prefer to keep the artwork in your family, you may opt to leave it to your heirs. You could make specific bequests of individual artworks to various family members, but there are no guarantees that the recipients will keep the pieces and treat them properly. A better approach may be to leave the collection to a trust, LLC or other entity — with detailed instructions on its care and handling — and appoint a qualified trustee or manager to oversee maintenance and display of the collection and make selling and purchasing decisions.
3. Donating your artwork can be an effective way to avoid capital gains tax and estate tax and to ensure that your collection becomes part of your legacy. It also entitles you or your estate to claim a charitable tax deduction. To achieve these goals, however, the process must be handled carefully. For example, to maximize the charitable deduction, the artwork must be donated to a public charity rather than a private foundation. And the recipient’s use of the artwork must be related to its tax-exempt purpose. Also, if you wish to place any conditions on the donation, you’ll need to negotiate the terms with the recipient before you deliver the items.

If you plan to leave your collection to loved ones or donate it to charity, it’s critical to discuss your plans with the intended recipients. If your family isn’t interested in receiving or managing your artwork or if your charitable beneficiary has no use for it, it’s best to learn of this during your lifetime so you have an opportunity to make alternative arrangements.

Seek a professional appraisal

It’s vitally important to have your artwork appraised periodically by a professional. The frequency depends in part on the type of art you collect, but generally it’s advisable to obtain an appraisal at least every three years, if not annually.

Regular appraisals give you an idea of how the collection is growing in value and help you anticipate tax consequences down the road. Also, most art donations, gifts or bequests require a “qualified appraisal” by a “qualified appraiser” for tax purposes.

In addition, catalog and photograph your collection and gather all appraisals, bills of sale, insurance policies and other provenance documents. These items will be necessary for the recipient or recipients of your artwork to carry out your wishes.

Enjoy your collection

A primary goal of estate planning is to remove appreciating assets from your estate as early as possible to minimize gift and estate taxes. But for many, works of art are more than just assets. Indeed, collectors want to enjoy displaying these works in their homes and may be reluctant to part with them. We can help you properly address your art collection in your estate plan.

© 2023