Every year brings special tax challenges, but the coming filing season may present special wrinkles that wealthy clients need to start readying for now.
For example, higher interest rates may alter some high-earners attitudes about taxes this season. The wealthy “tended to not like to pay estimated taxes, especially when the rates were low. This [rate] environment may see a change in attitude,” said Morris Armstrong, enrolled agent and RIA at Armstrong Financial Strategies in Cheshire, Conn., referring to new higher interest on late-payment penalties. “I’m also seeing an uptick in 2023 for charitable giving [and] funding donor-advised funds using appreciated stock.”
Several key provisions of the Tax Cuts and Jobs Act of 2017 will expire two years from Dec 31. These potential changes include a drastic lowering of the estate tax exemption, elimination of the $10,000 limit on the state and local tax (SALT) itemized deduction and curtailing of certain favorable tax brackets and the qualified business income deduction, among others. Countermoves include starting to whittle taxable estates up to the annual gift-tax exclusions ($18,000 per individual recipient for 2024) and accelerating or postponing income.
“Wealthy taxpayers should begin planning for these looming changes, as the next 24 months will inevitably pass too quickly,” said Patrick Malloy, director of tax at Crescent Grove Advisors in Milwaukee.
“There have not been any significant changes in the income or estate tax laws since the 2017 Tax Cuts and Jobs Act. Individual taxpayers are less likely to have losses to harvest in 2023 than in 2022, but otherwise they shouldn’t have any surprises in filing their 2023 taxes,” said Isaac Bradley, director of financial planning at Homrich Berg in Atlanta.
The increase in standard deductions for 2024, which the IRS implemented as an offset to inflation, should also figure into planning, advisors said.
“It is important that wealthy clients be aware of the planning opportunities leading up to the 2025 TCJA sunset,” Bradley said. “Two opportunities are around bunching charitable gifts and accelerating retirement distributions. Bunching charitable deductions by prefunding the next two years’ charitable gifts is a great way for clients to take a larger itemized deduction this year then take the increased standard deduction in 2024 and 2025. Clients with large traditional retirement accounts might consider accelerating retirement fund distributions or doing a Roth conversion to take advantage of the lower current tax rates before they go back up in 2026.”
John Pantekidis, managing partner and general counsel at wealth advisory firm TwinFocus in Boston, said now is the time to review assets, liquidity needs and goals before creating a year-end tax and philanthropic strategy. These are among the first steps:
• Estimating any remaining federal lifetime gift/estate exemptions and generation-skipping transfer (GST) lifetime exemptions.
• Evaluating 2023 and anticipated 2024 federal adjusted gross income to determine optimal timing for charitable gifting.
• Identifying ideal assets for charitable and multi-generational planning, as well as assets that would be ideal for monetization, such as over-concentrated equity positions that are highly appreciated.
“If you’re an executive with a large stock position, place a portion in charitable remainder trust to help diversify, postpone or eliminate cap gains and enjoy current tax deduction and stream of income,” Pantekidis said.
Advisors said wealthy clients should follow Moore v. United States, a case before the Supreme Court with the potential to redefine constitutional taxation of realized and unrealized income and pave or block the way for a “wealth tax” on the uber-rich.
“Although the controversy relates to a one-time tax imposed on the shareholders of certain foreign corporations in 2017, there could be far-reaching consequences in other areas of taxation, depending on how broadly the court rules,” Malloy said.
There’s no time to waste, as some wealth transfer strategies take multiple years to implement, advisors said. “We’re advising clients for whom a wealth transfer makes sense to work with their estate planning attorney and go ahead and get a plan in place,” Bradley said.
“Careful and meticulous recordkeeping throughout the year is critical,” said Brett Walters of TBH Advisors in Brentwood, Tenn. “Working with a great financial and tax planner can keep you abreast of any pending changes in tax laws and how to navigate the changing tax landscape, but that doesn’t only happen in tax season.”