Timing is critical in estate planning for many reasons. Most obviously, because plans are intended to help ease the burden in the aftermath of a death, they must be in place before one dies (or loses the capacity to make legal decisions). But timing also matters to the extent that the law changes and alters the options available to planners.
This is most clear when it comes to taxes. Different tax rates, allowable deductions, and other details are frequently changing. Many individuals act quickly to take advantage of certain favorable situations before they are set to expire.
IRA Gift Tax Break
For example, a provision is currently set to expire which allows those over 70 ½ years old to save on taxes when donating part of an individual retirement account (IRA) to charity. Specifically, the law allows account holders over the age threshold to donate up to $100,000 without the donation being taxed as an early withdrawal.
A Wall Street Journal story on the soon-to-be ending tax benefits explores the how taking advantage of the charitable IRA rollover provision may also be used strategically to help legally lower one’s burden on new taxes. For example, those in higher income brackets will soon be hit with a 3.8% tax on net investment income. Withdrawals from the IRA may therefore help lower one’s income and avoid meeting threshold where newer taxes kick in or deductions are limited. In addition, taking advantage of the charitable donation can lower overall income to the point where Social Security benefits taxes are reduced or Medicare premium increases are avoided.
Just because the IRA gift tax benefit may disappear at the end of the year does not automatically mean that it is prudent for you to take any specific action. Every New Yorker is in a slightly different position, and it is critical to have tailored advice before taking action. For example, it still may make more sense in your case to make a donation of appreciated assets from outside the IRA, allowing a fair-market value tax deduction and avoiding capital gains tax. An individualized analysis would need to be conducted to see what makes the most sense in your case.
If you would like help understanding how gifts, retirement accounts, trusts and other details can be used to best position you and your family, please contact our NY estate planning lawyers today.