One way to avoid this possibility is to take advantage of the IRS’s gifting rules now: These allow a taxpayer to gift up to $15,000 per person each year without triggering a gift tax.
If clients want to give money to someone and they have the resources, Edelman said, and if they want to avoid higher estate taxes in the near future, they and their spouse can each give $15,000 tax free for a total gift of $30,000 per recipient. If the person is married he or she can give a total to their spouse as well, and together that means $60,000 goes to their household without triggering taxes.
“If you do the same thing in January, that’s $120,000 you’re able to gift to them, all without gift taxes,” he added. “There’s no tax deduction for these gifts, but it could help with estate planning.”
Under current law, the lifetime gift tax exemption allows each taxpayer to gift up to $11.58 million, up from $11.4 million in 2019, without having to pay a gift tax to the IRS. Married couples are able to transfer assets of $23.16 million without incurring federal tax.
On January 1, 2026, however, those exemptions are set to revert to $5.6 million per person as a result of sundown exemptions that will expire and result in significantly lower tax-free gifting limits.
A number of tax experts don’t think the wealthy should count on the higher exemptions lasting until 2026, since Congress will likely look for tax revenue to shore up a pandemic-strapped economy and mounting shortfalls.
“There will be lots of new tax laws over the next six years,” Edelman said. “If you’re wealthy, this will be an issue.”
He also recommends taking a look at harvesting unrealized losses in stock portfolios. “Due to volatility of the market, you may have investments that are down in value from January 1. Selling those assets can help them either offset gains in other assets or create a tax deduction for those losses. Clients can reduce their gains by amount of losses and claim up to $3,000 in excess losses on this year’s tax returns. Any losses beyond that, one can apply to prior years, through amended returns, or apply the losses to future years,” Edelman said.
He also recommends that taxpayers make sure, if possible, that they contribute the maximum allowable to workplace retirement plans and IRAs in order to get their full deduction this year, since a Biden White House plans to substitute a tax credit for the deduction.
The caveat for deductions? “If you received unemployment benefits, which $30 million Americans did, that income is taxable but not eligible for purposes of calculating allowable IRA contributions for the year,” Edelman said.