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Retirement, investments, financial planning for every stage of life—learn about it all here at Invested,
a blog from your Wealth Management Advisors at Kirtland Financial Services.

All Posts > Taxes

Taxes Estate Planning

When developing your estate plan, you can do well by doing good. Leaving money to charity rewards you in many ways. It gives you a sense of personal satisfaction, and it can save you money in estate taxes.
 

A few words about transfer taxes

The federal government taxes transfers of wealth you make to others, both during your life and at your death. In 2020, generally, the federal gift and estate tax is imposed on transfers in excess of $11,580,000 and at a top rate of 40 percent. There is also a separate generation-skipping transfer (GST) tax that is imposed on transfers made to grandchildren and lower generations. For 2020, there is a $11,580,000 exemption and the top rate is 40 percent.

Note: The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax basic exclusion amount and the GST tax exemption to $11,180,000 in 2018. After 2025, they are scheduled to revert to their pre-2018 levels and cut by about one-half.

You may also be subject to state transfer taxes.

Careful planning is needed to minimize transfer taxes, and charitable giving can play an important role in your estate plan. By leaving money to charity the full amount of your charitable gift may be deducted from the value of your gift or taxable estate.
 

Make an outright bequest in your will

The easiest and most direct way to make a charitable gift is by an outright bequest of cash in your will. Making an outright bequest requires only a short paragraph in your will that names the charitable beneficiary and states the amount of your gift. The outright bequest is especially appropriate when the amount of your gift is relatively small, or when you want the funds to go to the charity without strings attached.
 

Make a charity the beneficiary of an IRA or retirement plan

If you have funds in an IRA or employer-sponsored retirement plan, you can name your favorite charity as a beneficiary. Naming a charity as beneficiary can provide double tax savings. First, the charitable gift will be deductible for estate tax purposes. Second, the charity will not have to pay any income tax on the funds it receives. This double benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account.
 

Use a charitable trust

Another way for you to make charitable gifts is to create a charitable trust. There are many types of charitable trusts, the most common of which include the charitable lead trust and the charitable remainder trust.

A charitable lead trust pays income to your chosen charity for a certain period of years after your death. Once that period is up, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest.

A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction.

Note: There are costs and expenses associated with the creation of these legal instruments.
 

Why use a charitable lead trust?

The charitable lead trust is an excellent estate planning vehicle if you are optimistic about the future performance of the investments in the trust. If created properly, a charitable lead trust allows you to keep an asset in the family while being an effective tax-minimization device.

For example, you create a $1 million charitable lead trust. The trust provides for fixed annual payments of $80,000 (or 8 percent of the initial $1 million value of the trust) to ABC Charity for 25 years. At the end of the 25-year period, the entire trust principal goes outright to your beneficiaries. To figure the amount of the charitable deduction, you have to value the 25-year income interest going to ABC Charity. To do this, you use IRS tables. Based on these tables, the value of the income interest can be high — for example, $900,000. This means that your estate gets a $900,000 charitable deduction when you die, and only $100,000 of the $1 million gift is subject to estate tax.
 

Why use a charitable remainder trust?

A charitable remainder trust takes advantage of the fact that lifetime charitable giving generally results in tax savings when compared to testamentary charitable giving. A donation to a charitable remainder trust has the same estate tax effect as a bequest because, at your death, the donated asset has been removed from your estate. Be aware, however, that a portion of the donation is brought back into your estate through the charitable income tax deduction.

Also, a charitable remainder trust can be beneficial because it provides your family members with a stream of current income — a desirable feature if your family members won't have enough income from other sources.

For example, you create a $1 million charitable remainder trust. The trust provides that a fixed annual payment be paid to your beneficiaries for a period not to exceed 20 years. At the end of that period, the entire trust principal goes outright to ABC Charity. To figure the amount of the charitable deduction, you have to value the remainder interest going to ABC Charity, using IRS tables. This is a complicated numbers game. Trial computations are needed to see what combination of the annual payment amount and the duration of annual payments will produce the desired charitable deduction and income stream to the family.

Charitable giving is important to many and how it’s handled can have an effect on your financial goals. Take a look at your charitable contributions as part of a comprehensive look at your financial plan. Kirtland Financial Services specializes in comprehensive financial planning—the whole picture!

Get started with Kirtland Financial Services today!

 
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Taxes

 

What are appropriate checklists for year-end tax planning?

Tax planners often develop checklists to guide taxpayers toward year-end strategies that might help reduce taxes. Typically, suggestions are grouped into several different categories, such as "Filing Status" or "Employee Matters," for ease of reading.

When year-end approaches, it might be wise to review each suggestion under the categories that may apply to you.

Filing status and dependents

  • If you're married (or will be married by the end of the year), you should compare the tax liability for yourself and your spouse based on all filing statuses that you might select. Compare the results when you file jointly and when you file married separately. Determine which results in lower overall taxation.
  • If you and several other people financially support someone but none of you individually qualifies to claim the individual as a dependent, you should consider making an agreement with all of the other parties to ensure that at least one of you can claim the individual as a dependent. Certain tax benefits may be available if you can claim an individual as a dependent.

Family tax planning

  • Determine whether you can shift income to family members who are in lower tax brackets in order to minimize overall taxes.
    • Tip: The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn't exceed one-half of their support, and (3) those age 19 to 23 who are full-time students and whose earned income doesn't exceed one-half of their support.
  • Consider making gifts of up to $15,000 per person federal gift tax free under the annual gift tax exclusion. Use assets that are likely to appreciate significantly for optimum income tax savings.
  • Take advantage of tax credits for higher education costs if you're eligible to do so. These may include the American Opportunity (Hope) credit and the Lifetime Learning credit. Note that these credits are based on the tax year rather than the academic year. Therefore, you should try to bunch expenses to maximize the education credits.
    • Tip: If you have qualified student loans (and meet all necessary requirements), you may be entitled to take a deduction for the interest you paid during the year. The maximum amount you can deduct is $2,500.

Employee matters

  • Self-employed individuals (who generally use the cash method of accounting) can defer income by delaying the billing of clients until next year. You may also be able to defer a bonus until the following year.
  • Use installment sale agreements to spread out any potential capital gains among future taxable periods.

Business income and expenses

  • Accelerate expenses (such as repair work and the purchase of supplies and equipment) in the current year to lower your tax bill.
  • Increase your employer's withholding of state and federal taxes to help you avoid exposure to estimated tax underpayment penalties.
  • Pay last-quarter taxes before December 31 rather than waiting until January 15.
  • If you have significant business losses this year, it may be possible for you to apply them to the prior year's returns to receive a net operating loss carryback refund. If you had significant income in prior years, you should maximize the current year's losses by deferring income if possible.
  • In certain circumstances, it may be possible for the full cost of last-minute purchases of equipment to be deducted currently by taking advantage of Section 179 deductions.
  • Generally, you are able to make a contribution to your retirement plan at any time up to the due date (plus extensions) for filing a given year's tax return.

Financial investments

  • Pay attention to the changes in the capital gains tax rates for individuals and try to sell only assets held for more than 12 months.
  • Consider selling stock if you have capital losses this year that you need to offset with capital gain income.
  • If you plan to sell some of your investments this year, consider selling the investments that produce the smallest gain.
  • Personal residence and other real estate
  • Make your early January mortgage payment (i.e., payment due no later than January 15 of next year) in December so that you can deduct the accrued interest for the current year that is paid in the current year.
  • If you want to sell your principal residence, make sure you qualify to exclude all or part of the capital gain from the sale from federal income tax. If you meet the requirements, you can exclude up to $250,000 ($500,000 for married couples filing jointly). Generally, you can exclude the gain only if you used the home as your principal residence for at least two out of the five years preceding the sale. In addition, you can generally use this exemption only once every two years. However, even if you don't meet these tests, you may still be able to qualify for a reduced exclusion if you meet the relevant conditions.
  • Consider structuring the sale of investment property as an installment sale in order to defer gains to later years.
  • Maximize the tax benefits you derive from your second home by modifying your personal use of the property in accordance with applicable tax guidelines.

Retirement contributions

  • Make the maximum deductible contribution to your IRA. Try to avoid premature IRA payouts to avoid the 10 percent early withdrawal penalty (unless you meet an exception). Contribute the full amount to a spousal IRA, if possible. If you meet all of the requirements, you may be able to deduct annual contributions of $6,000 to your traditional IRA and $6,000 to your spouse's IRA. You may be able to contribute and deduct more if you're at least age 50.
  • Set up a retirement plan for yourself, if you are a self-employed taxpayer.Set up an IRA for each of your children who have earned income.
  • Minimize the income tax on Social Security benefits by lowering your income below the applicable threshold.

Charitable donations
  • Make a charitable donation (cash or even old clothes) before the end of the year. Remember to keep all of your receipts from the recipient charity.
  • Use appreciated stock rather than cash when contributing to charities. This may help you avoid income tax on the built-in gain in the stock, while at the same time maximizing your charitable deduction.
  • Use a credit card to make contributions in order to ensure that they can be deducted in the current year.

Adoption and medical expenses

  • Take advantage of the adoption tax credit for any qualified adoption expenses you paid. In 2020, you may be able to claim up to $14,300 (up from $14,080 in 2019) per eligible child (including children with special needs) as a tax credit. The credit begins to phase out once your modified AGI exceeds $214,520 (up from $211,160 in 2019), and it's completely eliminated when your modified AGI reaches $254,520 (up from $251,160 in 2019).
  • Maximize the use of itemized medical expenses by bunching such expenses in the same year, to the extent possible, in order to meet the threshold percentage of your AGI.

No two tax situations are the same. For a look at your individual tax liability and how it fits into your financial plans, Kirtland Financial Services is standing by.

MAKE YOUR APPOINTMENT NOW!

 
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Taxes COVID-19

Due to the coronavirus pandemic, the due date for filing federal income tax returns and making tax payments has been postponed by the IRS from Wednesday, April 15, 2020, to Wednesday, July 15, 2020. No interest, penalties, or additions to tax will be incurred by taxpayers during this 90-day relief period for any return or payment postponed under this relief provision. 

The relief applies automatically to all taxpayers, and they do not need to file any additional forms to qualify for the relief. The relief applies to federal income tax payments (for taxable year 2019) and estimated tax payments (for taxable year 2020) due on April 15, 2020, including payments of tax on self-employment income. There is no limit on the amount of tax that can be deferred. 
  
Note: Under this relief provision, no extension is provided for the payment or deposit of any other type of federal tax, or for the filing of any federal information return. 
  
Need more time? 
If you're not able to file your federal income tax return by the July due date, you can file for an extension by the July due date using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional three months (until October 15, 2020) to file your federal income tax return. You can also file for an automatic three-month extension electronically (details on how to do so can be found in the Form 4868 instructions). There may be penalties for failing to file or for filing late. 

Filing for an extension using Form 4868 does not provide any additional time to pay your tax. When you file for an extension, you have to estimate the amount of tax you will owe and pay this amount by the July filing due date. If you don't pay the amount you've estimated, you may owe interest and penalties. In fact, if the IRS believes that your estimate was not reasonable, it may void your extension. 

Tax refunds 
The IRS encourages taxpayers seeking a tax refund to file their tax return as soon as possible. Apparently, most tax refunds are still being issued within 21 days of the IRS receiving a tax return. 

You matter to us! We’re here to help you make sense of these recent changes.

Book your appointment with a Wealth Management Advisor today by calling 505-254-4364 or online at KirtlandFCU.org/Schedule

 

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