As 2022 draws to a close and the New Year dawns, we need to think of…tax planning! Some years Congress tweaks the laws more than in other years. While 2022 held plenty of events: the war in Ukraine, an improved “bivalent” coronavirus vaccine addressing new coronavirus variants, the U.S. midterms elections, etc., it was a relatively quiet year for legislative changes impacting planning. Still, even in a quiet year, some things change due to inflation increases, etc.
Estate Tax Planning
Applicable Exclusion rises from $12.06 million in 2022 to $12.92 million in 2023.
GST Exemption rises from $12.06 million in 2022 to $12.92 million in 2023.
Annual Exclusion for present interest gifts rises to $17,000 in 2023.
Annual Exclusion for gifts to a Noncitizen Spouse rises to $175,000 in 2023.
In a few years, at the end of 2025, the Applicable Exclusion and the GST Exemption will revert to one-half of their current levels, in other words to $5 million, adjusted for inflation from the 2011 base year. This isn’t relevant for most Americans. However, if you have well over these amounts, you may want to consider removing these amounts from your estate while you still have the temporarily doubled Exclusion and Exemption to cover the transfers. You still have until January 1, 2026, before the law is set to change unless Congress changes things dramatically before then, which appears unlikely at least for the next two years given the closely divided Congress and Senate.
Income Tax Planning
Standard deduction amount:
Married, filing jointly, increases from $25,900 in 2022 to $27,700 in 2023.
Single, increases from $12,950 in 2022 to $13,850 in 2023.
Head of household, increases from $19,400 in 2022 to $20,800 in 2023.
State and Local Tax (SALT) deduction cap remain at $10,000 in 2023.
The income tax brackets creep slightly higher, as well.
As you plan for 2023, remember to keep your receipts for expenses and charitable contributions. With the high standard deduction amount and the cap on State and Local Tax deductions remaining at $10,000, fewer taxpayers are itemizing. In fact, the percentage of taxpayers itemizing is less than half what it was before the Tax Cuts and Jobs Act of 2017. According to the Tax Foundation, less than 14% of taxpayers itemize each year after the TCJA. Before then, over 31% of taxpayers itemized. If you give to charity, you may want to group your charitable contributions into one year and itemize them in that one year, and take the standard deduction in other years. You can do this by consolidating giving to a Donor Advised Fund (“DAF”) in one year. Then you can make grant recommendations from your DAF each year. This way, your tax planning won’t impact your favorite charities.
Let’s look at an example. John and Mary make $17,000 of charitable contributions to their church, alma mater, or other charities each year. They have state and local tax deductions above the $10,000 limit. They have a total of $27,000 of deductions and they’d be better off taking the standard deduction ($27,700 in 2023). Rather than giving $17,000 for each of three years to charity, they could give 3 x $17,000 ($51,000) in one year and they’d get a much better tax result. If they gave $51,000 in year 1 to a DAF, combined with their SALT deduction of $10,000, they’d have $61,000 of deductions instead of the standard deduction of $27,700. In years 2 and 3, they’d just have the SALT deduction of $10,000 and no charitable deduction but could still take the standard deduction ($27,700 in 2023). The charities would get their funds each year just as usual when John and Mary make the grant recommendations from their DAF. John and Mary would get a much better tax result. In year 1, they’d have $61,000 of deductions instead of $27,700, an increase of $33,300. Their deductions in years 2 and 3 would not change, because either way they’d be taking the standard deduction in those years. Depending upon John and Mary’s income tax bracket, this increased deduction could save them over $12,000 in federal taxes alone.
A little planning can produce a much better tax result. Have a happy, healthy, and prosperous 2023!
Steve Hartnett, J.D., LL.M (Tax)
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128