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Pamela Avraham

March 4, 2025 Deadline to Reduce 2024 Estate & Trust Income Taxes

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If you are the executor of an estate or the trustee of a trust, you should know that egregiously high income tax rates apply to estates and trusts at very low levels of income.  In 2024, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $15,200 of income. That’s not very high.   For example, let’s say an estate has income of $215,200. The tax on the $200,000 (income in excess of the $15,200 threshold), at 40% equals a tax of $80,000. Ouch!

Suggestions?

There is hope!  Estates and trusts only pay tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%.  Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.

What Can I Do Now?

It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return.  This year’s deadline is          March 4, 2025. 

 

Estates don’t need to have a calendar year end.  For example, if a decedent died in June, the year end for the Estate can be May 31, in which case the 65-day rule would allow distributions until August 4th.    Executors should keep this in mind when planning distributions.  

Are there Other Factors to Consider? 

Yes.  In addition to financial considerations, there are other factors to keep in mind.  If a beneficiary is not financially knowledgeable and cannot manage money, or has a drug habit or is mentally unstable, you may not want to distribute the funds. These factors may outweigh the potential tax savings of larger distributions from a Trust or Estate.

Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.

March 5, 2024 Deadline to Reduce 2023 Estate & Trust Income Taxes

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If you are the executor of an estate or the trustee of a trust, you should know that egregiously high income tax rates apply to estates and trusts at very low levels of income.  In 2023, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $14,451 of income. That’s not very high.   For example, let’s say an estate has income of $214,451. The tax on the $200,000 (income in excess of the $14,451 threshold), at 40% equals a tax of $80,000. Ouch!

Suggestions?

There is hope!  Estates and trusts only pays tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%.  Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.

What Can I Do Now?

It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return.  This year’s deadline is          March 5, 2024. 

Estates don’t need to have a calendar year end.  For example, if a decedent died in June, the year end for the Estate can be May 31, in which case the 65-day rule would allow distributions until August 4th.    Executors should keep this in mind when planning distributions. 

Are there Other Factors to Consider?

Yes.  In addition to financial considerations, there are other factors to keep in mind.  If a beneficiary is not financially knowledgeable and cannot manage money, or has a drug habit or is mentally unstable, you may not want to distribute the funds. These factors may outweigh the potential tax savings of larger distributions from a Trust or Estate.

Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.

Year-End Tax Options

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‘Tis the season to review your investments and make some tax beneficial year-end moves. 

Capitalize on Winners 

Your investments are a good starting point for implementing tax-saving strategies. You can benefit from favorable tax rates on long-term capital gains by selling and taking profits on appreciated securities you’ve held longer than one year. Long-term gains are currently taxed at a maximum rate of 15% for most taxpayers and 20% for taxpayers with taxable income of over $492,300 ($553,850 for joint filers) in 2023.

Cut Your Tax Bite With Losers

Investments that have lost value and have consistently underperformed may be perfect sell candidates, particularly if you’re not confident of a turnaround. By selling your losers, you can use your losses to balance out gains on appreciated securities you’ve sold. Capital losses are fully deductible to offset capital gains from any source and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Any losses that you can’t deduct for 2023 can be carried over for deduction in future years, subject to the same limits.

Don’t make taxes your only reason for selling a security. Many factors enter the decision to sell securities, including how the sale of a specific investment would affect your overall portfolio.

Donating Appreciated Securities

Many public charities accept contributions of publicly traded stock or other securities. A donation of highly appreciated securities held more than one year provides a potential tax deduction for the securities’ fair market value while also avoiding the capital gains tax that would be due if the securities were sold.

Need an RMD in 2023?

Your first RMD (required minimum distribution) must be taken by April 1 of the year following the year in which you turn 72 for those who reached age 72 by Dec. 31, 2022. The first RMD for those turning 72 after Dec. 31, 2022 must be taken by April 1 of the year following the year you turn 73. After that, your RMDs must be taken by Dec. 31 of each year.

Want to save Taxes on the RMD? Use a Qualified Charitable Distribution

A qualified charitable distribution (QCD) allows you to donate to qualified charities directly from your individual retirement account (IRA). While there is no tax deduction allowed for the donated assets, they don’t count as income either. What’s more, a QCD can help satisfy your annual required minimum distribution (RMD). To make a QCD you must be at least 70½ years of age. Gifts must be made directly from your traditional or Roth IRA to a public charity. Up to $100,000 may be transferred annually per spouse.

Heir to an inherited IRA? The IRS is providing relief to heirs of inherited IRAs who are subject to the 10-year rule, allowing them to skip required minimum distributions in 2023. However, there are reasons why one should take an RMD in 2023, although not required:

  • If he has high medical expenses, the medical expenses will offset the RMD income eliminating the income tax on the RMD
  •  By taking an RMD in 2023, he will have a smaller balance to distribute in the remaining years of the ten RMD years, avoiding larger RMDs at higher tax rates

Contact your tax advisor at Urbach & Avraham, CPAs to discuss options suitable for you.

Need to take an RMD in 2023…Perplexed?

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When is your Required Beginning Date (RBD) to take the first RMD?  Your first RMD (required minimum distribution) must have been taken by April 1 of the year following the year in which you reached 72 for those who reached age 72 by Dec. 31, 2022. The first RMD for those turning 72 after Dec. 31, 2022 must be taken by April 1 of the year following the year you turn 73. After that, your RMDs must be taken by Dec. 31 of each year.

Beneficiary of an IRA account? (Rules below apply to IRA owners who passed away after Jan. 1, 2020)

An individual non-spouse beneficiary must distribute the entire account balance by the 10th calendar year after the account owner’s death. If the IRA owner reached his required beginning date, the beneficiary must take annual RMDs based generally on his own life expectancy. These RMDs must begin by December 31 of the year after the owner’s death. Although the beneficiary must take annual RMDs, you will need to fully distribute the account within ten years from the owner’s date of death.

If the IRA owner passed away before the RBD, the RMDS are not required. However, the entire account balance must be distributed within ten years from the owner’s date of death.

The IRS is providing relief to heirs of inherited IRAs who are subject to the 10-year rule, allowing them to skip required minimum distributions in 2023. However, there are reasons why one should take an RMD in 2023, although not required:

  • If he has high medical expenses, the medical expenses will offset the RMD income eliminating the income tax on the RMD
  • By taking an RMD in 2023, he will have a smaller balance to distribute in year ten, avoiding a bunched higher RMD at higher tax rates

If an estate is the beneficiary of an IRA, and the account owner reached his RBD, the estate must make distributions based on the remaining life expectancy of the IRA owner. If the IRA owner passed away before his RBD, the assets must be completely distributed within five years of the owner’s passing, but no annual RMD is required.

IRA owner passed away in 2023? If the IRA owner passed away in 2023 prior to taking this year’s RMD, the beneficiary, whether an individual or an estate must distribute the RMD by the end of 2023.

Want to save income taxes on the RMD? – Use a Qualified Charitable Distribution (QCD) in 2023 For IRA owners with charitable intentions, there is a substantial tax benefit using a QCD. The owner contributes all or part of his RMD to charity. The portion contributed to charity will not be taxed. QCDs can be made as early as age 70.5, even though minimum distributions are not required until age 73. A QCD may only be made by an original account owner, not by a beneficiary.

What happens if I don’t take the RMD in 2023? If an account owner fails to withdraw an RMD, the amount not withdrawn is taxed at 25% (reduced from 50% for missed RMDs prior to Dec. 31, 2022).

Still confused? Everyone’s situation is different. Please consult with a tax advisor at Urbach & Avraham, CPAs, to analyze the impact on your personal situation.

 

Retirement Plans – One Size Doesn’t Fit All

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Retirement plans offer significant tax advantages to small business owners. Here is an overview of several types of plans available to small businesses, their features and restrictions. 

SEP- Simplified Employee Pension Plan– Contributions are made by the employer only, up to the lesser of 25% of employee’s compensation or $66,000 for 2023. Employees are immediately 100% vested. No loans are permitted. Withdrawals permitted anytime. Primary advantage is how simple a SEP is to administer. No need for annual IRS filing. Required Minimum Distributions (RMDs) must be withdrawn by April 1 of the year you reach age 73.

SIMPLE IRA Plans– Employees may defer income and make salary contributions. For 2023, employees may contribute up to $15,500, $19,000 if age 50 or older. If employee contributes, employers must match employee’s contribution up to 3% of his compensation. If employee doesn’t contribute, employers must make a contribution of 2% of employee’s compensation. Employees are immediately 100% vested in employer’s contribution. Loans are not permitted. Withdrawals permitted anytime. No need for annual IRS filing. RMDs must be withdrawn by April 1 of the year you reach age 73. 

401(k) Plans– Employees may make elective deferrals up to $22,500 in 2023, $30,000 if age 50 or older. Employer may make contributions to employee’s accounts. Total employer and employee contributions are limited to lesser of 100% of employee’s compensation or $66,000 in 2023, $73,500 if age 50 or older. Employees vest per plan terms. Loans may be allowed. Withdrawals may be permitted for hardships. Annual IRS filings are required. RMDs must be withdrawn by April 1 of the year you reach age 73. In contrast to a SEP or SIMPLE IRA, if you are still working, you may wait until retirement to withdraw RMDs.  

No one plan fits all. Owners need to weigh many factors. Companies with high employee turnover may not want immediate vesting. How simple is the plan to administer? Do you want the employees to contribute to the plan? Do you want to enable loans? Do employees want ability to make withdrawals? 

Which plan is suitable for your firm? Contact your tax advisor at Urbach & Avraham, CPAs. We can review your company’s goals to evaluate which plan best meets your needs.