I would like to introduce you to our quest columnist for this month. Robert Gonzales, CPA is the Managing Partner of Linn Thurber LLP, a specialized Houston-based CPA firm providing U.S. tax compliance and advisory services to high net worth individuals and families worldwide.
One of the difficulties of year-to-year tax planning is that you’re trying to hit a moving target. Legislation, rules and brackets can all change with the political winds or even with just inflation. That makes it difficult to feel comfortable knowing your plan is optimal. This is especially true in a year like 2017, when a new administration has taken the reins of power in Washington.
The Back Story
To get a feel for key tax issues you might overlook in the current climate, we spoke to Robert Gonzales, a CPA and managing partner at Linn Thurber LLP, a Houston-based firm providing tax compliance and advisory services to high-net-worth individuals and families. Gonzales said that issues in the realm of estate planning have been spilling over to impact income tax planning.
What You Should Know
For example, the Unified Estate and Gift Tax Exemption, originally set at $5 million in the American Taxpayer Relief Act of 2012, rose to $5.45 million ($10.9 million per couple) with inflation adjustments for 2016. For 2017, it moves to $5.49 million ($10.98 million per couple). Past presidential candidate Hillary Clinton vowed to reduce the exemption to just $3.5 million, while also raising the rate. With that option now off the table, at least for the next four years, fewer families need to worry about the estate tax.
As a result, Gonzales said his firm is having conversations with clients that are focused less on estate taxes, and more on reducing current taxes so that heirs will one day be left with more. Some of this extra focus involves capital gains and deciding which assets to sell and which to keep.
“Assets with greater appreciation might be retained rather than given away to take advantage of the step-up in basis that will occur at death,” Gonzales said.
The step-up simply means that, under current law, the starting value of an asset “resets” to the market value at the time when the asset is inherited. By holding on to an appreciating asset until then, a person (and his or her heirs) can avoid taxes on pre-inheritance capital gains.
“These clients will continue to use the gift tax exclusions to reduce their annual income and minimize their tax bill,” Gonzales added. Each year, individuals may gift up to $14,000 to as many recipients as they wish without triggering the federal gift tax or even having the amount count towards the lifetime gift tax exemption. Also, spouses can elect to split gifts to double the annual exclusion to $28,000, per donee.
And for taxpayers age 70 ½ and older, keep in mind that you can transfer a maximum of $100,000 from your traditional IRA directly to a qualified charity.
“There is no charitable deduction for the transfer,” Gonzales said. “But the transfer counts toward the IRA owner’s annual required minimum distribution. The benefit to the IRA owner is that $100,000 is not included in income and consequently, it lowers the amount of the total required minimum distribution that must be reported as income.“
These issues can be complex, and the variables can change over time. If you want to discuss how they apply to your unique situation, or if you just want the peace-of-mind that comes from having an optimal plan in place, we’re here for you. Please contact Jim Waters, CFP®, at 713.964.4028 or firstname.lastname@example.org. And for any specific tax questions, feel free to contact Robert Gonzales, 713-600-1452 or email@example.com.