Annual Exclusion Gifts – Each individual can make a cumulative annual gift tax exclusion gift of $15,000 per donee during 2019 and 2020 (or $30,000 for a married couple electing to split gifts), without using any portion of his federal estate and gift tax exemption. The federal estate and gift tax exemption for 2019 is $11.4 million per individual (allowing a married couple to shield up to $22.8 million from federal estate and gift taxes) and is projected to increase for inflation in 2020 to $11.58 million per individual (or $23.16 million for a married couple). Annual exclusion gifts can be made outright, through 529 Plan benefits (education savings accounts), or in special qualifying trust structures. For those still considering such gifts, it may be worthwhile to plan for 2019 and 2020 at the same time, keeping in mind that gifts for 2020 can be made effective as of Jan 1.
Capitalizing on Losses – Harvest tax deductible losses to offset taxable gains for 2019. However, be mindful of the 30-day wash sale rule of Internal Revenue Code Section 1091, which could disqualify a deduction of the capital loss if the same, or substantially identical, security is purchased within 30 days after selling at a loss. If you’ve sold investments at a gain this year, consider selling some losing investments to absorb the gains. This is commonly referred to as “harvesting” losses.
If, however, you’ve sold investments at a loss this year, consider selling other investments in your portfolio that have appreciated, to the extent the gains will be absorbed by the losses. If you believe those appreciated investments have peaked in value, you’ll essentially lock in the peak value and avoid tax on your gains. Before selling investments, consider the netting rules for gains and losses, which depend on whether gains and losses are long term or short term. To determine your net gain or loss for the year, long-term capital losses offset long-term capital gains before they offset short-term capital gains. In the same way, short-term capital losses offset short-term capital gains before they offset long-term capital gains. You may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income. Any remaining net losses are carried forward to future years.
Charitable Giving – If you are in a high-income year, consider “prepaying” future charitable contributions to generate current income tax deductions. This is also something to consider given the new higher standard deduction (for 2019, $12,200 for individuals and $24,400 for married couples) that might make bunching of charitable deductions worthwhile so you can benefit from the standard deduction in a year where your charitable deductions are reduced due to the prior year bunching/prepayment. This can be accomplished simply by increasing the contributions to your favorite charities, in general, or you can defer the receipt by the charitable organizations you wish to benefit (or even defer the decision as to which ones to benefit) by contributing to a donor-advised fund, a private foundation, charitable lead trust or charitable remainder trust or purchasing a charitable gift annuity. Both the charitable gift annuity and charitable remainder trust options allow you to retain an income stream for life and defer the transfer of the remaining funds to the charity until after your death.
It is important to meet with your estate planning attorney before the end of every year in November and December to review your estate plan and to make sure it sure you are maximizing on tax laws and maximizing any benefits.