Netting capital gains and losses

1. Net short-term gains and short-term losses.
2. Net long-term gains and long-term losses.
3. Net short-term against long-term.
4. Deduct up to $3,000 of excess losses against ordinary income per year.
5. Carry over any remaining losses to future tax years.

Applicable exclusion: $12.92 million

Taxes are imposed on transfers, by gift or at death, above an applicable exclusion amount, which is indexed to inflation (currently $12.92 million for an individual). With proper planning, it is possible for a married couple to use two exclusion amounts. For example, an executor can make a “portability” election to transfer any unused exclusion from a deceased spouse to a surviving spouse. Consult your tax and legal advisors to determine the appropriate strategy for applying the portability rules.

Estate tax rate: 40%

The estate tax rate is 40% for any amount exceeding $12.92 million (or exceeding $25.84 million for married U.S. residents or citizens) with proper planning.

Generation-skipping tax exemption: $12.92 million

Gift tax annual exclusion: $17,000

Each individual may transfer up to $17,000 per person per year to any number of beneficiaries (family or nonfamily) without paying gift tax or using up any available applicable exclusion during one’s lifetime.

Explore wealth transfer opportunities

There are actions you can take to potentially reduce your future estate tax liability and to maximize your lifetime gifting. However, make these decisions in conjunction with other wealth planning decisions to make sure assets pass effectively and efficiently and fulfill your wishes and the needs of your beneficiaries.

• One action that may pass assets effectively and efficiently is paying medical and educational expenses of your beneficiaries. Medical and education expenses paid on behalf of anyone directly to the institution are excluded from taxable gifts and are unlimited in amount.
• Another possible action is an outright gift in excess of $17,000. While such outright gifts are simple to execute and can reduce taxable estates, clients are sometimes reluctant to use them due to a lack of control and concerns about access once gifts are made.

Social Security and Medicare taxes

In 2023, individuals will be taxed 6.2% in Social Security taxes, up to $160,200 of earnings, at which point there are no additional taxes. Medicare taxes are applied to 1.45% of earnings and there is no maximum wage cap. An extra 0.9% may be applied on the earnings over $200,000 for single filers and for joint filers earning over $250,000. Contact your tax advisor for current Social Security and Medicare tax information.

Earnings test

The earnings test indicates the level of earnings permissible for Social Security recipients without incurring a deduction from benefits. These limits are indexed to increases in national earnings.

Worker younger than full retirement age	$21,240
Year worker reaches full retirement age (applies only to earnings for months prior to attaining full retirement age)	$56,520
Worker at full retirement age	No limit

Maximum monthly benefit: $3,627

This benefit is for an individual who reaches full retirement age in 2023 and earns at least the maximum wage base for 35 years.

Taxation thresholds

A certain percentage of an individual’s Social Security benefits may be subject to taxation when his or her provisional income¹⁰ exceeds certain threshold amounts:

	Up to 50% taxed	Up to 85% taxed
Married filing jointly	$32,000 – $44,000	More than $44,000
Single	$25,000 – $34,000	More than $34,000
Married filing separately	85% taxable11

Congress recognized that the doubling of the standard deduction under the Tax Cuts and Jobs Act of 2017 would effectively eliminate the ability of many taxpayers to obtain a benefit for their charitable contributions, potentially causing many taxpayers to give less. To counteract this, a change was made to increase the adjusted gross income (AGI) limitation for cash contributions to a public charity from 50% to 60%.

When deciding to make a direct gift of stock or cash, remember that your deduction may be limited by your income as shown in the following chart. The limitation is based on the type of organization and the type of gift.

AGI limitations on deductions for charitable gifts

Type of organization	Cash gifts	Long-term capital gain property12	Tangible personal property13
Public charity	60%	30% using fair market value of the asset contributed	30% using fair market value of the asset contributed
Private foundation	30%	20% using fair market value if the asset contributed is publicly traded stock	20% using tax/cost basis of the asset contributed14

Although the AGI limitation for cash contributions was increased, it is important to consider donating appreciated property. Generally, if you donate appreciated property that has been held for over one year, you are eligible to deduct the fair market value without paying income tax on the unrealized gain. However, you can only deduct up to 30% of your AGI when making these gifts of long-term capital gains property (to a public charity). Being able to avoid the payment of taxes on the unrealized gain combined with the charitable contribution deduction may produce a better tax result than donating cash. A common example would be donating stock held long term that has increased in value since its purchase.

Consider donating stock instead of cash

This hypothetical example shows the potential advantages of a charitable donation of stock that has increased in value during the time the investor owned it (appreciated stock) vs. cash. It assumes a $10,000 gift; the stock has a $2,000 cost basis and was held for longer than 12 months; and the investor is in the 37% ordinary-income and 20% long-term capital-gains tax brackets, subject to the 3.8% Medicare tax on investment income, and able to itemize deductions.

Gift	Income Tax Savings†	Capital Gain Tax Savings	Medicare Tax on Investment Income Savings†
$10,000 Cash	$10,000 x 37%= $3,700	n/a	n/a
$10,000 Stock	$10,000 x 37%= $3,700	$8,000 x 20%= $1,600	$8,000 x 3.8%= $304

By donating cash, the investor saves $3,700 in income taxes. However, by donating appreciated stock, they also save $1,600 in capital gains taxes and $304 in the Medicare tax on investment income they would have incurred if they had sold the stock instead of donating it. This information is hypothetical and is provided for informational purposes only. It is not intended to represent any specific return, yield, or investment, nor is it indicative of future results.

When considering charitable gifting and capturing potential tax deductions, review your tax situation and carefully determine which assets to give. Gifts made to qualified, tax-exempt organizations are generally deductible, but as noted in the AGI limitations on deductions for charitable gifts table above, are subject to limitations based on the type of organization (public or private), the asset being gifted, and your AGI. Charitable contributions that are not deductible in the current year due to AGI limitations can be carried forward for up to five years.

• Gifts made via check or credit cards are considered deductible in the current year if the check is written and mailed or the charge to the credit card posts on or before December 31. Important note: Since December 31, 2023 falls on a Sunday, different deadlines apply. For 2023, check sent by USPS must be postmarked by December 30. Check sent by FedEx, UPS, or another carrier must arrive by December 29.
• Gifts of stock are considered complete on the date the brokerage firm transfers title, which can take several business days (or the date the taxpayer can substantiate permanent relinquishment of dominion and control over the stock), so be sure to plan these types of transfers well before December 31.
• Obtain and keep receipts and be aware of any value received for goods or services that may reduce the value of any tax deduction.

Naming a qualified charity as the beneficiary of your 401(k) or Traditional IRA upon your death can keep your estate and your heirs from having to pay income taxes on the distributions from those retirement assets. The full amount of your retirement assets will benefit the named charity because charities do not pay income taxes. The retirement assets will remain as part of your estate, but your estate will receive a charitable tax deduction. Alternatively, you can divide your retirement assets between your loved ones and charity, naming both as beneficiaries.

Depending on your circumstances, there are some additional planning options to consider:

• As noted earlier in this guide, QCDs allow individuals who are at least age 70½ to distribute up to $100,000 indexed for inflation, per year directly from their Traditional or Traditional Inherited IRA to a 501(c)(3) nonprofit with no federal income tax consequences. See details discussed earlier in the IRA section.
• If you are approaching retirement and anticipate lower ordinary income during retirement, you may find it beneficial to explore making a large gift to a donor-advised fund while working instead of smaller gifts during retirement.
• A charitable remainder trust (CRT) is a strategy in which annual income is distributed to one or more noncharitable beneficiaries, either for a life term or a term of not more than 20 years.

Take advantage of charitable deductions

The higher standard deduction combined with limits on other deductions means fewer people will be able to deduct their charitable contributions. An option to get a deduction is to bunch your donations together into one year and take the standard deduction in an alternate year if eligible.

For example, instead of making contributions in December 2023, you can make your 2023 contributions in January 2024. Making your 2024 contributions later during the year might give you enough to itemize in one calendar year. You could then take the standard deduction in 2023 and again in 2025, when you don’t make contributions. If you are looking to maximize your charitable contributions, your tax advisor can assist with determining whether AGI limitations will apply and the timing of the gifts to fully utilize your deduction.

529 plans

• Earnings, if any, accumulate tax-deferred; qualified withdrawals (such as tuition, fees, supplies, books, and required equipment) may be free of federal and state income taxes. See IRS publication 970 for more details.
• There are no federal income, state-residency, or age restrictions.
• Potential state-tax incentives are available in some states.
• Plans may be funded up to the annual exclusion amount, $17,000 (single) or $34,000 (married) per year per donation recipient. Donors can also elect to make five years’ worth of annual exclusion amounts in a single year’s contribution, up to $85,000 (single) and $170,000 (married). For example, a couple with twins could fund $170,000 for each child after birth and let those funds potentially grow tax-free until needed. Contributions in excess of annual exclusions should be filed on a gift tax return (Form 709) to report use of the donor’s available lifetime exclusion or the election to superfund five years’ worth of annual contributions. Most plans allow for contributions by people other than the original donors, such as aunts/uncles, grandparents, friends, etc. You should consult with your tax advisor about filing a gift tax return to make this election.
• Aggregate contribution limits vary by state – roughly $200,000 to $500,000 per beneficiary.
• Elementary and secondary school tuition expenses of up to $10,000 per year are qualified education expenses for federal tax purposes. This flexibility may allow earlier access for private tuition prior to college. However, not all states conform to this definition of qualified expenses, so check with your tax advisor and confirm your state rules before taking a distribution for this purpose.
  While the benefits under 529 plans for early education may sound exciting, taxpayers may find it more advantageous to leave the 529 plan account untouched. This may allow the 529 the potential to grow tax-free during the primary education years and instead use it for college and post-graduate studies.
• Qualified education loan payments are distributions that may be used to pay the principal and/or interest on qualified education loans and are limited to a lifetime maximum amount of $10,000 per person. Not all states have conformed to this law, and therefore a distribution may be considered a nonqualified withdrawal in your state. Nonqualified withdrawals are subject to federal and state income tax and a 10% penalty.

Please consider the investment objectives, risks, charges, and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your advisor. Read it carefully before you invest. The availability of such tax or other benefits may be conditioned on meeting certain requirements.

Considerations for excess 529 funds

• If a plan is overfunded due to your child (or whoever the plan was set up for) not having enough (or any) qualifying education expenses, you can change the plan beneficiary so long as the new beneficiary is a family member of the previous beneficiary (a sibling, spouse, parent, first cousin, etc.) and it is not a custodial 529 plan.
  – The donor can still access those tax-deferred funds; however, income taxes and penalties on distributions not used for qualified education expenses will apply on the growth of the assets.
  – While changing a 529 plan beneficiary is generally not a taxable event, changing to a new beneficiary in a younger generation may have gift tax consequences if not done appropriately.
• Achieving a Better Life Experience (ABLE) accounts allow for tax-advantaged funds to help disabled individuals pay for qualified disability-related expenses.
  – Rollovers from 529 plans to ABLE accounts (529A plans) are permissible, subject to federal and state limitations. Be aware that rollover rules may vary by state.
• Beginning in 2024, 529 designated beneficiaries can make a rollover contribution from their 529 to their Roth IRA if certain conditions are met (state laws may vary):
  – 529 must have been maintained for 15 years
  – May not exceed the aggregate of contributions and earnings in the account more than five years before the rollover
  – May not exceed $35,000 lifetime limit
  – Are subject to annual Roth IRA contribution limits
  – The Roth IRA owner must have earned income at least equal to the amount of the rollover

Coverdell Education Savings Accounts (ESAs)

• Annual, non-deductible contributions are limited to a total of $2,000 per child from all contributors, regardless of the number of ESAs for that beneficiary.
• Contributions may be made until the child, sometimes referred to as the designated beneficiary, reaches age 18.
• Special needs beneficiaries are allowed contributions beyond 18.
• Maximum contribution amount is reduced if a contributor’s MAGI is between $95,000 and $110,000 for individual filers or $190,000 and $220,000 for joint filers.
• Contributions can be made to both an ESA and a state sponsored 529 plan for the same year for the same beneficiary.
• Qualified distributions are generally federally tax-free, if they aren't more than the beneficiary’s adjusted qualified education expenses for the year. Qualified Coverdell Education Savings Account distributions are not subject to state and local taxation in most states.
• Funds must be used before age 30 or transferred to a family member under the age of 30 (except for special needs beneficiaries).
• A prior advantage of ESAs over 529s was the ability to use an ESA for private elementary or secondary school tuition. This advantage has been minimized now that 529 plans offer similar distributions and permit higher funding contributions, which are not phased out by the donor’s income level.

American Opportunity Credit

Maximum credit: $2,500 per student per year, for first four years of qualified expenses paid

MAGI phase-outs
Married filing jointly	$160,000 – $180,000
Single filer	$80,000 – $90,000

Up to 40% ($1,000) of the American Opportunity Credit is refundable. This means that even if your tax bill is zero, you can receive a refund of up to $1,000.

Lifetime Learning Credit

Maximum credit: 20% of the first $10,000 (per tax return) of qualified expenses paid in the current tax year

MAGI phase-outs
Married filing jointly	$160,000 – 180,000
Single filer	$80,000 – 90,000

Exclusion of U.S. savings bond interest

MAGI phase-outs
Married filing jointly	$137,800 – $167,800
Others	$91,850 – $106,850

Student loan interest deduction

Maximum deduction: $2,500

MAGI phase-outs
Married filing jointly	$155,000 – $185,000
Others	$75,000 – $90,000