Articles Posted in Taxation

The link between wealth management and tax-related services is strong and growing stronger every year. For those who are either building an estate plan, making decisions about yearly gifts, establishing trusts, or partaking in special needs planning, it can be crucial to think about how yearly taxes will change based on the structure of your assets. With April 15 having recently come and gone, it is natural to feel like you may have been rushed into filing your taxes or that you did not have the chance to include everything you intended to include.

On today’s blog, we cover some important connections between the two industries, as well as what you can do if you feel like you need more time on your taxes. As always, this blog represents only a portion of what clients should know about the overlap between wealth management and tax-related services, and it is never a bad idea to speak with an experienced attorney that can help you navigate both worlds as seamlessly as possible.

Filing for an Extension

If you are in the process of starting to prepare your estate plan, do not hesitate to request a tax extension. During tax season, there is a common misconception that requesting an extension leads to an increased audit risk, but this is not the case. Instead, extensions can offer much-needed relief to those who are taking time to get their affairs in order. For those who will end up filing differently depending on the structure of their estate plan, it can be well worth it to ask the IRS for more time to file. Additionally, creating and finalizing an estate plan can take many months, and it is better to participate in the process thoroughly and carefully, so as not to skip any key steps in drafting your plan.

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Do you have a 2024 resolution? Have you thought through this year’s goals and priorities? The best place to start could be a place you hadn’t considered: estate planning. Time and time again, we speak with clients and prospective clients that put off estate planning for the “later” stages of their lives. Because their circumstances do not vary much from year to year, they say, there is no reason to spend the time and resources engaging in estate planning now when they could just start later.

We always dissuade our clients from thinking this way. To state the obvious, we never know what’s around the corner. With no way of predicting the future, the best tool we have to ensure that our wishes are respected in the long-term future is making a thorough estate plan as soon as possible. Below, we detail several reasons why now is the best time to start (or continue) your estate planning journey.

Tax Exemptions in 2026

The federal government is gearing up to significantly alter how it handles certain kinds of tax exemptions. For example, did you know that the gift and estate tax exemptions will all be cut in half in 2026? The lifetime gift tax exemption was $11.58 million in 2020, increased to $12.92 million in 2023, and is now scheduled to decrease to $6 million in 2026. As for the estate tax exemption, it currently sits at $12.92 million per person. In 2026, the exemption is scheduled to decrease to roughly $7 million.

These exemptions can have major implications for those trying to pass on assets to their heirs and loved ones. This means that if you want to do more in 2024 and 2025 to pass on gifts to loved ones, 2024 is the time to put plans into action. By waiting until the end of 2025, you risk missing out on a major tax benefit that will be substantially less beneficial within the next two years.

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As inflation has risen, many Americans are all too familiar with the increased cost of living. However, one overlooked effect of inflation is the rate at which estates and gifts are taxed. Estate taxes, gift taxes, and the valuation of real property in a decedent’s estate can all depend on IRS adjustments for inflation. As a result, the ultimate tax rate on your estate may rise or fall with inflation, leading to unpredictability for your beneficiaries. Fortunately, you can apply several tax strategies to protect your estate from fluctuations in the tax rate.

How Can I Use Tax Laws to Plan My Estate?

A recent Forbes article highlights several provisions in tax law that can help you with estate planning during inflation. First, take advantage of the increased lifetime gift tax exemption and generation-skipping transfer (GST) tax exemption. The lifetime gift tax exemption allows you to give away a large monetary amount in gifts throughout your lifetime without triggering taxation. The GST tax applies to inheritances that “skip” a generation (i.e., from your children to your grandchildren). The exemption allows you to set aside nontaxable gifts to benefit a grandchild, such as college tuition. In response to rising inflation, the IRS has increased the lifetime gift and GST tax exemption amounts. As a result, a higher monetary amount is now exempted from gift and GST taxes. To take advantage of these exceptions, you may consider giving a gift to your beneficiaries while they are still alive to reap the benefits of the increased exemptions.

In 2017, the US Congress passed a bill known as the Tax Cuts and Jobs Act, which was signed by the President and has since become law. The Act modifies the tax code in various ways, generally reducing the amount of taxes that American business owners are required to pay annually. Part of the Act includes a 20% pass-through tax deduction on rental property business income. This deduction could make a significant difference in the tax burden for landlords who operate their rental properties as a business.

According to an article recently published by a financial advising trade publication, taking advantage of the deduction may not be simple for all Colorado landlords. The deduction requires landlords to own the property personally or through a business entity such as an LLC. Additionally, the properties must be managed as a “business” and not as an investment. Although the exact requirements for a property to be managed as a business are not clearly laid out, landlords who meet certain requirements laid out by the IRS can ensure that they are able to use the pass-through deduction.

The IRS has established a “safe harbor” rule that allows Colorado residents and other Americans to utilize the pass-through deduction if they keep separate books for their rental properties and can show that at least 250 hours of real estate rental services are performed on the properties each year. The 250 hours do not need to be performed personally by the taxpayer and can include services such as maintenance, cleaning, lease preparation and negotiation, advertisement, collecting and processing rent, as well as other work performed on the business.

Every family should consider the impact of taxes on their assets when making important decisions. High net-worth individuals and families, however, know they should especially consider relevant tax laws before making big estate plan or asset management changes. But staying on top of the ever-changing task landscape can be tricky. Even small changes year over year can lay the foundation for tax-saving opportunities—or pitfalls. A skilled estate planning attorney can help clients with substantial estates plan for these changes and nuances while considering the potential impact of laws on the value of the estate.

For example, the IRS announced it will raise the estate and gift tax exclusion limit in 2023. Individuals can gift up to $12.92 million to their heirs and beneficiaries, an increase from $12.06 million in 2022. Combined limits for married couples will be nearly $26 million in 2023.

Tax-free gifts also see a higher annual limit for 2023. Individuals can give away $17,000 per recipient without reducing the lifetime exclusion, a $1,000 increase from $16,000 in 2022. These adjustments are a routine part of the IRS’s annual inflation adjustments.

Estate planning can seem complicated at any income level. Considering your assets, thinking through how you want those assets distributed, choosing guardians for your children, and selecting executors, trustees, and other fiduciaries can all take time and money, especially when done without the guidance of a skilled estate planning attorney. For high net worth individuals, though, this can be even more difficult with more assets of varied type to consider. Another issue high net worth individuals, who generally have more than $1 million in liquid assets, have to carefully consider is the impact of taxes on their estates. Taxes can limit the amount you ultimately bequeath to your beneficiaries. An attorney will know the ever-changing wealth and estate tax landscape and help you avoid taking a big hit when the time comes.

Wealth Transfer Taxes

In addition to the more commonly known income taxes, there are three types of taxes to consider when estate planning. These types of taxes are collectively known as wealth transfer taxes and include gift taxes, estate taxes, and generation-skipping taxes. These can all be minimized or avoided through creative planning and the use of trusts.

Gift taxes are taxes paid by a person who transfers assets to another person without receiving something in return and are quite common. There are federal gift taxes that range from 18% to 40%, depending on the amount of the gift, and some states impose gift taxes as well.

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The recently passed Inflation Reduction Act includes several initiatives that provide tax breaks and rebates for households that take steps to improve their energy efficiency. Consumers who make energy efficient home upgrades and purchases may qualify for up to $10,000 or more in these benefits, in addition to other benefits such as lower electricity bills and a smaller carbon footprint.

Tax Credits for Homeowners

Homeowners could get up to a 30% tax credit for installing solar panels or other renewable energy equipment, such as windmills. Costs incurred in installation from 2022 through 2032 qualify for a 30% tax credit. The credit falls in later years, dropping to 26% in 2033 and 22% in 2034. This extends a previous tax credit set to expire in 2023 and, starting in 2023, includes battery storage technology so homeowners can pair solar panels with storage.

Other home efficiency projects, such as energy-efficient windows and water heaters, also qualify for a 30% tax credit toward installation costs. The cap on these savings is $1,200 a year, though some projects can qualify for higher caps. The installations must meet certain efficiency criteria to qualify, and some specific items have individual caps. The credit also covers the cost of a home energy audit (up to $150) and an electrical panel upgrade (up to $600).

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It’s that time of year again: As the snow moves in, another year is on its way out. Although you may find yourself busy with holiday gatherings and the multitude of outdoor activities that Colorado has to offer each winter, it is also an important time to check in on your estate plan.

Here are some of the main areas of estate planning to review in 2021.

Tax Exclusions

Over the past several months, the U.S. Congress has been considering tax legislation that could drastically change the face of estate planning.

Versions of the Build Back Better bill have included provisions to trigger capital gains tax on a regular basis for assets held in trusts, upon death, and when making a gift. Congress also considered dramatically reducing the unified tax credit, which would have restricted the reach of grantor trusts as an estate-planning tool.

But the bill in its current form does not impact the estate tax system directly. Where does this leave Coloradans who have made changes to their estate plan in response to this legislation?

Members of the U.S. Congress recently proposed a striking $3.5 trillion spending plan that, if passed, would be funded largely through a significant tax overhaul. Here is what Colorado residents need to know about the tax increase proposal as it currently stands.

Reduction in the Unified Credit Amount

Effective in 2022, the current proposal halves the estate and gift tax exclusion. This change essentially reverses the Tax Cuts and Jobs Act’s recent change to the exclusion and will affect Coloradans with large estates.

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