Year-End Gifting and Estate Planning Tips

The elegant black box with a glimmering gold ribbon lay delicately on the polished floor, promising a surprise waiting to be unwrapped through the art of gift wrapping

by Frank Miltenberger

With the year coming to a close, now is a perfect time to think about your gift and estate tax planning. Below, we have outlined key opportunities to consider before year-end and for next year.

Annual Gifting Exclusion Limits for 2024 and 2025

For 2024, the annual gift tax exclusion is $18,000 per recipient (or $36,000 for married couples who gift to any one recipient). This means you can gift up to this amount to as many recipients as you’d like without dipping into your lifetime gifting exemption.

Looking ahead to 2025, the annual exclusion will increase to $19,000 per recipient, allowing for a $38,000 combined gift by a married couple to any one recipient.

Estate Tax Planning Considerations

In addition, thanks to the lifetime federal gift and estate tax exemption, the total amount you can give over your lifetime without incurring federal estate or gift taxes, is currently $13.61 million per individual ($27.22 million for married couples) in 2024. In 2025, this will increase to $13.99 million per individual ($27.98 million for married couples).

It is important to note that under current law, these historically high exemption levels are set to expire at the end of 2025. Beginning in 2026, the exemption will revert to pre-2018 levels, which is estimated to be around $6 million per individual unless Congress acts. As such, you may want to take advantage of these exclusions before the end of 2025.

We are here to help you make the most of these opportunities. If you have any questions or want to discuss strategies that work best for you, please do not hesitate to contact us.

408-252-1800

Feeling Charitable? Be Sure You Can Substantiate Your Gifts

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As the end of the year approaches, many people give more thought to supporting charities they favor. To avoid losing valuable charitable deductions if you itemize, you’ll need specific documentation, depending on the type and size of your gift. Here’s a breakdown of the rules:

Cash gifts under $250

A canceled check, bank statement or credit card statement will do. Or ask the charity for a receipt or “other reliable written record” that provides the organization’s name, the date and the amount of the gift.

Cash gifts of $250 or more

You’ll need a contemporaneous written acknowledgment from the charity stating the amount of the gift. That means you received the acknowledgment before the earlier of your tax return due date (including extensions) or the date you file your return. If you make multiple separate gifts to the same charity of less than $250 each (monthly contributions, for example) that total $250 or more for the year, you can still follow the substantiation rules for cash gifts under $250.

Noncash gifts under $250

Get a receipt showing the charity’s name, the date and location of the donation, and a description of the property.

Noncash gifts of $250 or more

Obtain a contemporaneous written acknowledgment from the charity that contains the information required for cash gifts, plus a description of the property.

Noncash gifts of more than $500

In addition to the above, keep records showing the date you acquired the property, how you acquired it and your adjusted basis in it. Also, file Form 8283.

Noncash gifts of more than $5,000 ($10,000 for closely held stock)

In addition to the above, obtain a qualified appraisal and include an appraisal summary, signed by the appraiser and the charity, with your return. (No appraisal is required for publicly traded securities.)

Noncash gifts of more than $500,000 ($20,000 for art)

In addition to the above, include a copy of the signed appraisal, not just a summary, with your return.

Finally, if you received anything in exchange for your donation, such as a book for making an online donation or food and drink at a fundraising event, ask the charity for the fair market value of the item(s). You’ll need to subtract it from your charitable deduction.

Saving taxes isn’t the primary motivator for charitable donations, but it may affect the amount you can afford to give. Substantiate your donations to ensure you receive the deductions you deserve.

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Not Every Disaster Allows for a Casualty Loss Tax Deduction

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Many Americans have become victims of natural disasters in 2024. Wherever you live, unexpected disasters may cause damage to your home or personal property, creating a “personal casualty loss.” This is defined as damage from a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, fire, act of vandalism or terrorist attack. You can deduct personal casualty losses only if you itemize on your tax return and, through 2025, only if the loss results from a federally declared disaster. There is, however, an exception to the latter rule. Suppose you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property. In that case, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.

In some cases taxpayers can deduct a casualty loss on the tax return for the preceding year and claim a refund. You may be able to file an amended return if you’ve already filed the relevant return.

Need help? Contact the office with your questions.

408-252-1800

Photo by Roman Castillo: https://www.pexels.com/photo/car-driving-in-rain-17679501/

The U.S. Election Outcome Likely to Have Major Impact on Taxes

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Having won control of the White House, the Senate and the House of Representatives, Republicans will have the opportunity to move forward their vision for federal taxes. What might this mean?

First, many provisions in President-Elect Donald Trump’s signature tax legislation from his first time in the White House, the Tax Cuts and Jobs Act (TCJA), are scheduled to expire at the end of 2025. Now, there’s a better chance that most provisions will be extended.

Second, the former and future president has suggested many other tax law changes during his campaign. Here’s a brief overview of some potential tax law changes:

Business Taxes

Numerous tax law changes have been discussed that would affect businesses, including changes affecting:

Corporate income tax rates:

The president-elect has suggested decreasing the current rate of 21% to 20%, and to 15% for corporations that manufacture products in the United States.

Research and development (R&D) expenses:

Proposals include expanding or revising R&D credits and removing mandatory capitalization and amortization of R&D expenditures. The latter would allow immediate R&D deductions in the year expenses are incurred.

Sec. 199A qualified business income (QBI) deduction:

This 20% deduction for certain income of sole proprietors and pass-through entities is set to expire at the end of 2025. There’s a good chance it will be extended or made permanent.

Bonus depreciation:

This deduction is currently at 60% and set to drop to 40% for 2025 and 20% for 2026, then disappear. One proposal would reinstate this to 100%.

Individual Taxes

Potential tax law changes are also on the horizon for individual taxpayers, such as related to the following:

Expiring provisions of the TCJA:

Examples of expiring provisions include lower individual tax rates, an increased standard deduction, and a higher gift and estate tax exemption. The president-elect would like to make the TCJA’s individual and estate tax cuts permanent. He’s also indicated that he’s open to revisiting the TCJA’s $10,000 limit on the state and local tax deduction.

Individual taxable income:

The president-elect has proposed eliminating income and payroll taxes on tips for restaurant and hospitality workers, and excluding overtime pay and Social Security benefits from taxation.

Child tax incentives:

President-Elect Trump has voiced support for increasing the current cap on the Child Tax Credit ($2,000 per qualifying child), but no formal policy proposal has been made.

Electric-Vehicle Credit:

The president-elect has said informally that he would consider eliminating the electric-vehicle credit. If you’re thinking about purchasing an electric vehicle, you may want to do so by the end of 2024 just in case the credit is eliminated for 2025.

Housing incentives:

President-Elect Trump has alluded to possible tax incentives for first-time homebuyers but no specific proposals relating to tax incentives for housing. The Republican platform calls for reducing mortgage rates by slashing inflation, cutting regulations, opening parts of federal lands to new home construction. It also proposes tax incentives for first-time homebuyers.

Tariffs

The president-elect has called for higher tariffs on imports, suggesting a baseline tariff of 10% to 20% on most imported goods, a 60% tariff on imports from China and a 100% tariff on vehicles imported from Mexico.

How Will You Be Affected?

Which extensions and proposals become law will depend on a variety of factors. For example, Congress has to pass tax bills before the president can sign them into law. Republicans don’t have wide margins in the Senate or House, which could make it challenging to get certain tax law changes passed that aren’t universally popular with Republicans. If you have questions about how you might be affected by potential tax law changes, please contact the office.

408-252-1800

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Unlocking Tax Savings: The Benefits of a Cost Segregation Study

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A cost segregation study allows a business property owner to accelerate depreciation deductions. That, in turn, enables the owner to reduce current taxable income and increase cash flow.

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. It then allows the personal property to be reclassified for tax purposes and deducted over a much shorter depreciation period. This strategy has been consistently upheld in the courts.

Fundamentals of Depreciation

Business buildings generally have a 39-year depreciation period. Typically, companies depreciate a building’s structural components (such as walls, windows, HVAC systems, plumbing and wiring) along with the building. Personal property (such as equipment, machinery, furniture and fixtures) is eligible for accelerated depreciation, usually over five or seven years.

Often, businesses allocate all, or most, of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be “part of a building” may, in fact, be personal property. Examples include removable wall and floor coverings, removable partitions, awnings, canopies, window treatments and signs.

Shine a Light on Outdoor Savings

Rules for outdoor lighting, parking lots, landscaping and fencing are tricky but can still lead to current tax deductions in certain situations. These expenditures are generally treated as capital improvements, subject to the 15-year depreciation rule. For instance, if you replace your business lighting to upgrade it or provide greater security at night, it qualifies as a deductible capital improvement. Similarly, landscaping projects designed to boost your curb appeal or provide environmental benefits are considered capital improvements.

On the other hand, routine maintenance (such as the costs of mowing and watering the lawn surrounding your business building) typically fall into the category of deductible business expenses, just like minor repairs.

Worth Checking Out

Although the relative costs and benefits of a cost segregation study will depend on your particular facts and circumstances, it can be a valuable investment.

And, under the Tax Cuts and Jobs Act, the potential benefits of a cost segregation study may be even greater than they were years ago because of enhancements to certain depreciation-related tax breaks.

Contact the office for further details.

408-252-1800

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Don’t Miss This Important Deadline: Required Minimum Distributions

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If you’re subject to required minimum distributions (RMDs), you must take your 2024 RMD by Dec. 31 to avoid penalties. RMDs are mandatory withdrawals from retirement plans such as 401(k)s, IRAs, SIMPLE IRAs and SEPs. Roth accounts aren’t subject to RMDs during the owners’ lifetimes. RMDs are taxable income subject to ordinary-income tax (not long-term capital gains) rates.

Previous tax law required RMDs to begin at age 72 and imposed a penalty of 50% on missed withdrawals. The SECURE 2.0 Act raised the age to 73 and lowered the penalty to 25% (or 10% if corrected within two years). Younger taxpayers can be subject to RMDs if they inherited a retirement account. Contact the office as soon as possible for help calculating the correct amount for your RMDs.

Here’s more from the IRS: IRS reminds those aged 73 and older to make required withdrawals from IRAs and retirement plans by Dec. 31; notes changes in the law for 2023 | Internal Revenue Service

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Business Gifts: What’s the Tax Treatment?

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During the holiday giving season, keep the following tax limits in mind. Your business can deduct only up to $25 per person per year for gifts to recipients such as clients and business partners. You can also generally deduct $25 per person per year for employee gifts.

If gifts to employees are infrequent and of minimal value (de minimis), they generally aren’t taxable to workers. Although the IRS doesn’t specify a dollar amount for a gift to qualify as a de minimis benefit, you should aim to spend $100 or less. However, if you give cash or cash-equivalents (such as gift cards), the gifts are considered compensation and taxable to employees regardless of the amount.

Photo by Antoni Shkraba: https://www.pexels.com/photo/person-giving-a-gift-box-5493207/