Tax Planning Considerations for High Earners
Estate & Gift Taxes
For gifts made in 2024, the gift tax annual exclusion is $18,000 and for 2025 it is $19,000.
For 2024, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $13,610,000 per person. For 2025, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $13,990,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2024 and 2025, only the first $185,000 and $190,000, respectively, of gifts to a non-U.S. citizen spouse is excluded from the total amount of taxable gifts for the year.
Tax planning strategies may include:
- Making annual exclusion gifts.
- Making larger gifts to the next generation, either outright or in trust.
- Creating a spousal lifetime access trust (SLAT) or a grantor retained annuity trust (GRAT) or selling assets to an intentionally defective grantor trust (IDGT).
Our High Net Worth team can offer assistance achieving your goals to minimize your tax liability and plan for the future.
Charitable Contributions
If you are planning to donate to a charity, it’s likely better to make your contribution before the end of the year to potentially save on taxes. There are many tax planning strategies we can discuss with you about charitable giving.
- Consider donating appreciated assets that have been held for more than one year, rather than cash. You benefit from a deduction for the FMV of your appreciated stock and avoid taxes on capital gains from the appreciation.
- Opening and funding a donor advised fund (DAF) is appealing to many as it allows for a tax-deductible gift in the current year and the ability to distribute those funds to charities over multiple years.
- Qualified charitable distributions (QCDs) are another beneficial option for those over age 70 1/2 who don’t typically itemize on their tax returns. If you have a required minimum distribution (RMD) from your retirement accounts, this could be a great strategy for you.
It is essential to maintain proper documentation of all donations, including obtaining a letter from the charity confirming that no goods or services were provided in exchange for donations of $250 or more.
Retirement Plan Contributions
Based on the key information here, individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs).
The SECURE Act
The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.
The SECURE Act 2.0
Beginning in 2023, the SECURE Act 2.0 raised the age at which a taxpayer must begin taking required minimum distributions (RMDs) to 73. If the individual reaches age 72 in 2024, the required beginning date for the first 2025 RMD is April 1, 2026.
401(k) or 403(b) Plan Elective Contributions
The maximum amount in elective contributions that an employee can make in 2024 to a 401(k) or 403(b) plan is $23,000 ($30,500 if age 50 or over and the plan allows “catch–up” contributions). For 2025, these limits are $23,500 and $31,000, respectively.
Designated Beneficiaries
The SECURE Act generally requires that designated beneficiaries of persons who died after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries, and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.
Inherited Retirement Plans
Under final Treasury regulations (issued July 2024) that address RMDs from inherited retirement plans of persons who died after December 31, 2019, and after their required beginning date, designated and non-designated beneficiaries will be required to take annual distributions, whether subject to a 10-year period or otherwise.