Financial Planning

Maximize Giving and Minimize Taxes with the Power of Qualified Charitable Distributions
Maximize Giving and Minimize Taxes with the Power of Qualified Charitable Distributions 850 500 smolinlupinco

Are you a philanthropic person nearing or past retirement age and facing required minimum distributions (RMDs) from your traditional IRA? There is a smart strategy that allows you to support the causes you care about while reducing your tax burden: Qualified Charitable Distributions (QCDs).

Here’s how it works:

Once you reach age 70½, you can make a cash donation to an IRS-approved charity out of your IRA. This method of transferring assets to charity leverages the QCD provision so you can direct up to $105,000 of their distributions to charity in 2024 (or $210,000 for married couples). 

By making QCDs, the money given to charity counts toward your RMDs but won’t increase adjusted gross income (AGI) or generate a tax bill.

There are several important reasons to keep your donation amount out of your AGI. When distributions are taken directly out of traditional IRAs, federal income tax of up to 37% (in 2024) and possible state income taxes must be paid. A QCD avoids these taxes. 

Here are some other potential benefits:

  1. You might qualify for other tax breaks. A lower AGI can reduce the threshold for itemizers who deduct medical expenses, which are only deductible to the extent they exceed 7.5% of AGI.
  2. You can skip potential taxes on your Social Security benefits and investment income, avoiding the 3.8% net investment income tax.
  3. It might help you bypass a high-income surcharge for Medicare Part B and Part D premiums that are triggered when AGI falls above a certain level.

Note: You can’t claim a charitable contribution deduction for a QCD that is not included in your income. Also, remember that the age after which you must begin taking RMDs is now 73, but the age you can start making QCDs is 70½.

To benefit from a qualified charitable distribution for 2024, you must arrange for the payment from your IRA to go directly to a qualified charity before December 31, 2024. 

QCDs are truly a win-win. You can use them to fulfill all or part of your RMD for the year. 

Think of it as a double-duty approach, supporting a cause you care about while meeting your IRA withdrawal needs. For example, if your 2024 RMDs are $20,000 and you make a $10,000 QCD, you only need to withdraw another $10,000 to satisfy your requirement.QCDs aren’t right for everyone, though. Depending on your unique situation, additional rules and limits may apply. Contact a Smolin advisor to discuss whether this strategy makes sense for you.

Decoding Corporate Estimated Tax: Which Method is Best for You?
Decoding Corporate Estimated Tax: Which Method is Best for You? 850 500 smolinlupinco

With the next quarterly estimated tax payment deadline coming up on September 16, it’s the perfect time to brush up on the rules for computing your corporate federal estimated payments. Ideally, your business can pay the minimum amount of estimated tax without triggering any penalties for underpayment. 

But how do you determine that amount? To avoid penalties, corporations must pay estimated tax installments equal to the lowest amount calculated using one of these four methods: 

Current Year Method

Pay 25% of the tax shown on the current tax year’s return (or, if no return is filed, 25% of the tax for the current year) by each of four corporate installment due dates –  generally April 15, June 15, September 15 and December 15. If a due date falls on a Saturday, Sunday or legal holiday, the payment is due the following business day.

Preceding Year Method 

Pay 25% of the tax shown on the return for the preceding tax year by each of four installment due dates. For 2022, corporations with taxable income of $1 million or more in any of the last three tax years can only use the preceding year method to determine their first required installment payment. Additionally, this method is not available to corporations whose last tax return covered less than a full year (i.e. new corporations) or corporations without a tax return from the previous year showing some tax liability.

Annualized Income Method

Under this option, a corporation can avoid the estimated tax underpayment penalty if it pays its “annualized tax” in quarterly installments. The annualized method estimates tax based on the corporation’s taxable income for the months leading up to the installment due date. It also assumes income will stay consistent throughout the year.

Seasonal Income Method

Corporations with recurring seasonal patterns of taxable income can annualize income by assuming income earned in the current year is earned in the same pattern as in preceding years. There’s a somewhat complicated mathematical test corporations must pass to establish that they meet the threshold to qualify to use this method.

If you think your corporation might qualify, reach out to your Smolin Advisor for assistance making that determination.If you find yourself needing to adjust estimated tax payments, corporations are able to switch between the four methods during the given tax year. Let the Smolin team help you determine the best method for your corporation.

Planning For Foreign Assets in Your Estate
Planning For Foreign Assets in Your Estate 850 500 smolinlupinco

If you own foreign assets but haven’t included them in your estate plan, it’s time to revisit your plan. It’s possible to structure the ownership of your foreign assets according to the laws of the U.S. and the country where they’re located. But you probably should engage the help of an experienced estate planning advisor so you avoid these common issues.

The Burden of Double Taxation

U.S. citizens are subject to federal gift and estate taxes on all worldwide assets, regardless of where they live or the location of the assets. This means that If you own assets in other countries, you run the risk of double taxation if the assets are also subject to inheritance, estate, and other death taxes in those countries. 

A foreign death tax credit can help offset the US gift or estate tax; however, those aren’t necessarily available in all situations.  It’s possible that you might be able to get a foreign death tax credit which can lower your US estate and gift tax. But that is often dependent on tax treaties the other country has with the United States, and in some cases those credits aren’t available.

You are a U.S. citizen if:

  • You were born in the U.S., whether or not your parents were ever U.S. citizens and regardless of where you currently reside, unless you’ve renounced your citizenship, or
  • You were born outside the U.S. but at least one of your parents was a U.S. citizen at the time.

Even if you’re not a U.S. citizen, living inside the U.S. can make your worldwide assets subject to US gifts and estate taxes. This depends on the concept of “domicile”, meaning you have made the U.S. your home and plan to return there when you leave. When the U.S. is your domicile, their gift and estate taxes apply to your assets outside that country, even if you leave the country. Unless you take action to change your domicile, these taxes apply.

This may not be cause for concern. The U.S. gift and estate tax exemption amount is $13.61 million for the 2024 tax year. But remember, the exemption amount is scheduled to revert to its pre-2018 level of $5 million (indexed for inflation) as of 2026 unless an act of Congress extends it. 

Regardless, it’s best to plan for potential estate tax in the future. Additionally, married couples have different and potentially more complex rules. This is specifically true if one spouse is not a U.S. citizen nor considered a resident for estate tax purposes.

Plan to make two wills

If you want your foreign assets distributed exactly as you’d prefer, your will must be valid in both the U.S. and the other countries where assets are located. While it can be possible to prepare a single will that meets the requirements of each jurisdiction, it is still preferable to have separate wills for your foreign assets. If you opt to have a separate will, written in the foreign country’s language (if not English), it can help smooth the probate process.

Should you opt to prepare two or more wills, you should definitely work with local counsel in each foreign jurisdiction so you can be certain your wills meet each country’s requirements. If possible, it’s preferred that your U.S. and foreign advisors are able to coordinate to avoid any nullifying conflicts between the two wills. 

The bottom line is that if you own foreign assets, the wisest decision is to work with a Smolin advisor to ensure your wishes are executed in the most tax-efficient way possible. Reach out to a Smolin Advisor for support in all your estate planning needs. 

21 Estate Planning Terms You Need to Know

21 Estate Planning Terms You Need to Know
21 Estate Planning Terms You Need to Know 850 500 smolinlupinco

Whether you’re making your first estate plan or need to update an existing one, it helps to speak the language. While most people are familiar with common terms like “trust” or “will,” the meanings of other estate planning terms may feel less clear. 

Keep this glossary of key terms handy to help you navigate the estate process with more confidence

  1. Administrator 

An individual or fiduciary appointed by a court to manage an estate if no executor or personal representative has been appointed or the appointee is unable or unwilling to serve.

  1. Ascertainable standard

This legal standard, typically relating to an individual’s health, education, maintenance, and support, is used to determine what distributions are permitted from a trust.

  1. Attorney-in-fact

The individual named under a power of attorney as the agent to handle the financial and/or health affairs of another person.

  1. Codicil 

A legally binding document that makes minor modifications to an existing will without requiring a complete rewrite of the document.

  1. Community property

A form of ownership in certain states in which property acquired during a marriage is presumed to be jointly owned regardless of who paid for it.

  1. Credit shelter trust

A type of trust established to bypass the surviving spouse’s estate to take full advantage of each spouse’s federal estate tax exemption. It’s also known as a bypass trust or A-B trust.

  1. Fiduciary

An individual or entity, such as an executor or trustee, who is designated to manage assets or funds for beneficiaries and is legally required to exercise an established standard of care.

  1. Grantor trust

A trust in which the grantor retains certain control so that it’s disregarded for income tax purposes and the trust’s assets are included in the grantor’s taxable estate.

  1. Inter vivos 

This is the legal phrase used to describe various actions (such as transfers to a trust) made by an individual during his or her lifetime.

  1. Intestacy

When a person dies without a legally valid will, a situation called “intestate,” the deceased’s estate is distributed in accordance with the applicable state’s intestacy laws.

  1. Joint tenancy

An ownership right in which two or more individuals (such as a married couple) own assets, often with rights of survivorship.

  1. No-contest clause

A provision in a will or trust that ensures that an individual who pursues a legal challenge to assets will forfeit his or her inheritance or interest.

  1. Pour-over will

A type of will that is used upon death to pass ownership of assets that weren’t transferred to a revocable trust.

  1. Power of appointment

The power granted to an individual under a trust that authorizes him or her to distribute assets on the termination of his or her interest in the trust or on certain other circumstances.

  1. Power of attorney (POA)

A legal document authorizing someone to act as attorney-in-fact for another person, relating to financial and/or health matters. A “durable” POA continues if the person is incapacitated.

  1. Probate

The legal process of settling an estate in which the validity of the will is proven, the deceased’s assets are identified and distributed, and debts and taxes are paid.

  1. Qualified disclaimer

The formal refusal by a beneficiary to accept an inheritance or gift or to allow the inheritance or gift to pass to the successor beneficiary.

  1. Qualified terminable interest property (QTIP)

Property in a trust or life estate that qualifies for the marital deduction because the surviving spouse is the sole beneficiary during his or her lifetime. The assets of the QTIP trust are therefore included in the estate of the surviving spouse, that is, the spouse who is the beneficiary of the trust, not the estate of the spouse who created the trust.

  1. Spendthrift clause

A clause in a will or trust restricting the ability of a beneficiary (such as a child under a specified age) to transfer or distribute assets.

  1. Tenancy by the entirety

An ownership right between two spouses in which property automatically passes to the surviving spouse on the death of the first spouse.

  1. Tenancy in common

An ownership right in which each person possesses rights and ownership of an undivided interest in the property.

Questions? Smolin can help. 

This brief roundup isn’t an extensive list of estate planning terms. If you have questions about these terms or others that aren’t listed here, reach out to us! We’re happy to provide additional context for any estate planning concepts you need more clarity on.

Retirement Account Required Minimum Distribution (RDM) Laws Are Evolving

Retirement Account Required Minimum Distribution (RDM) Laws Are Evolving
Retirement Account Required Minimum Distribution (RDM) Laws Are Evolving 850 500 smolinlupinco

Do you have a tax-favored retirement account, such as a traditional IRA? If so, that account will be subject to the federal income tax required minimum distribution (RMD) rules once you reach a certain age. (This applies even if you acquired the tax-favored retirement via an inheritance.)

These rules mean you’ll have to:

A) Make annual withdrawals from the account(s) and pay any resulting income tax
B) Lower the balance of your inherited Roth IRA sooner than you may have planned

But even if this information isn’t news to you, recent tax law changes could impact the way you approach these accounts. Let’s take a deeper look at the most recent rules. 

What to know about Required Minimum Distribution (RMD) 

Under RMD rules, affected individuals need to take annual withdrawals (required minimum distributions) from tax-favored accounts. Unless the RMD meets the definition of a tax-free Roth IRA distribution, doing this will typically trigger a federal income tax bill. A state tax bill is also possible.

There is a favorable exception for original owners of Roth IRA accounts, who are exempt from RMD rules during their lifetimes. However, RMD rules do come into play for inherited IRAs, including Roth IRAs.

Starting age delayed

Enacted in 2022, the SECURE 2.0 law adjusted the age at which account owners must start taking RMDs. Instead of taking RMDs for the calendar year in which you turn age 72, you may now decide to wait to take your initial RMD until April 1 of the year after you turn 72.

SECURE 2.0 also increased the starting age for RMDs to 73 for account owners who turn 72 between 2023 and 2032. So, if you turned 72 in 2023, you’ll be 73 in 2024, and your initial RMD will be for calendar 2024. You must take that initial RMD by April 1, 2025. Otherwise, you could face a penalty for failure to follow the RMD rules.

The tax-smart strategy is to take your initial RMD, which will be for calendar year 2024, before the end of 2024 instead of in 2025 (by the April 1, 2025, absolute deadline). Then, take your second RMD, which will be for calendar year 2025, by Dec. 31, 2025. With this approach, you avoid having to take two RMDs in 2025 and paying double the taxes in that year.

Penalty reduced

The IRS can assess an expensive penalty if you fail to withdraw at least the RMD amount for the year. Prior to the enactment of SECURE 2.0, this penalty was 50% on the shortfall. That penalty is now 25%, or 10% if you withdraw the shortfall within the designated  “correction window.”

10-year liquidation rule draws controversy

Under the original SECURE Act, most non-spouse IRA and retirement plan account beneficiaries are required to empty inherited accounts within ten years of the account owner’s death. Otherwise, they may face a penalty tax for failing to comply with the RMD rules.

According to IRS proposed regulations issued in 2022, beneficiaries who are subject to the original SECURE Act’s 10-year account liquidation rule must take annual RMDs, calculated in the usual fashion — with the resulting income tax. The inherited account must still be empty at the end of the 10-year period. This means beneficiaries can’t just wait ten years and then empty the inherited account.

This requirement to take annual RMDs during the ten-year period has drawn much debate. And, as a result, the IRS stated in Notice 2023-54 that beneficiaries subject to the ten- year rule who did NOT take RMDs in 2023 will not be penalized. The Notice also explains that the IRS will issue new final RMD regulations, which won’t take effect until sometime in 2024 (at the earliest). 

Questions? Smolin can help

Required Minimum Distribution rules can be confusing, especially for beneficiaries. However, breaking these rules can be costly. Contact your accountant for the most up-to-date advice on the best tax-wise RMD strategy for your unique situation. 

2024 Q2 Tax Deadlines for Businesses and Employers

Key 2024 Q2 Tax Deadlines for Businesses and Employers
Key 2024 Q2 Tax Deadlines for Businesses and Employers 850 500 smolinlupinco

The second quarter of 2024 has arrived! If you’re a business owner or other employer, add these tax-related deadlines to your calendar. 

April 15

  • Calendar-year corporations: File a 2023 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due.
  • Corporations: Pay the first installment of estimated income taxes for 2024. Complete Form 1120-W (worksheet) and make a copy for your records.
  • Individuals: File a 2023 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868). Pay any tax due.
  • Individuals: pay the first installment of 2024 estimated taxes (Form 1040-ES), if you don’t pay income tax through withholding.

April 30

  • Employers: Report FICA taxes and income tax withholding for the first quarter of 2024 (Form 941). Pay any tax due.

May 10

  • Employers: Report FICA taxes and income tax withholding for the first quarter of 2024 (Form 941), if they deposited on time, and fully paid all of the associated taxes due.

May 15

  • Employers: Deposit withheld income taxes, Medicare, and Social Security for April if the monthly deposit rule applies.

June 17

  • Corporations: Pay the second installment of 2024 estimated income taxes.

Questions? Smolin can help

This list isn’t all-inclusive, which means there may be additional deadlines that apply to you. Contact your accountant to ensure you’re meeting all applicable tax deadlines and learn more about your filing requirements.

Ensuring Transparency When Using Non-GAAP Metrics to Prepare Financial Statements

Ensuring Transparency When Using non-GAAP Metrics to Prepare Financial Statements
Ensuring Transparency When Using non-GAAP Metrics to Prepare Financial Statements 850 500 smolinlupinco

Mind the GAAP!

Staff from the Securities and Exchange (SEC) commission expressed concerns at last November’s Financial Executives International’s Corporate Financial Reporting Insights Conference about the use of financial metrics that don’t conform to U.S. Generally Accepted Accounting Principles (GAAP).

According to Lindsay McCord, chief accountant of the SEC’s Division of Corporation Finance, many companies struggle to comply with the SEC’s guidelines on non-GAAP reporting. 

Increasing concerns 

The GAAP guidelines provide accountants with a foundation to record and summarize business transactions with honest, accurate, fair, and consistent financial reporting. Generally, private companies don’t have to follow GAAP, though many do. By contrast, public companies are required to follow GAAP by the SEC.

The use of non-GAAP measures has increased over time. When used to supplement GAAP performance measures, these unaudited figures do offer insight. However, they may also be used to artificially inflate a public company’s stock price and mislead investors. In particular, including unaudited performance figures—like earnings before interest, taxes, depreciation and amortization (EBITDA)—positions companies to cast themselves in a more favorable light. 

Non-GAAP metrics may appear in the management, discussion, and analysis section of their financial statements, earnings releases, and investor presentations.

Typically, a company’s EBITDA is greater than its GAAP earnings since EBITDA is commonly adjusted for such items as: 

  • Stock-based compensation
  • Nonrecurring items
  • Intangibles
  • Other company-specific items

Non-GAAP metrics or adjustments can also be selectively presented to give the impression of a stronger financial picture than that of audited financial statements. Companies may also fail to clearly label and describe non-GAAP measures or erroneously present non-GAAP metrics more prominently than GAAP numbers. 

10 questions to ask

To help ensure transparent non-GAAP metric disclosures, the Center for Audit Quality (CAQ) recommends that companies ask these questions: 

1. Would a reasonable investor be misled by the non-GAAP measure presented? What is its purpose? 

2. Is the most comparable GAAP measure more prominent than the non-GAAP measure? 

3. Are the non-GAAP measures presented as necessary and appropriate? Will they help investors understand performance? 

4. Why has management chosen to incorporate a specific non-GAAP measure alongside well-established GAAP measures?

5. Is the company’s disclosure substantially detailed on the purpose and usefulness of non-GAAP measures for investors? 

6. Does the disclosure adequately describe how the non-GAAP measure is calculated and reconcile items between the GAAP and non-GAAP measures?

7. How does management use the measure, and has that use been disclosed?

8. Is the non-GAAP measure clearly labeled as non-GAAP and sufficiently defined? Is there a possibility that it could be confused with a GAAP measure?

9. What are the tax implications of the non-GAAP measure? Does the calculation align with the tax consequences and the nature of the measure?

10. Do the company’s material agreements require compliance with a non-GAAP measure? If so, have those material agreements been disclosed?

The CAQ provides additional questions that address the consistency and comparability of non-GAAP metrics.

Questions? Smolin can help

Non-GAAP metrics do have positive potential. For example, when used appropriately, they can provide greater insight into the information that management considers important in running the business. To avoid misleading investors and lenders, though, care must be taken. 

To discuss your company’s non-GAAP metrics and disclosures in more detail, contact your accountant.

Can Social Security Benefits Be Taxed?

Can Your Social Security Benefits Be Taxed?
Can Your Social Security Benefits Be Taxed? 850 500 smolinlupinco

Did you know that Social Security benefits can be federally taxed? It’s true. Depending on your income, up to 85% of your benefits could be impacted by federal income tax.

Understanding provisional income

How do you determine the amount of Social Security benefits to report as taxable income? That depends on your “provisional income.”

To calculate provisional income, begin with your adjusted gross income (AGI). You can find it on Page 1, Line 11 of Form 1040. Next, subtract your Social Security benefits to arrive at your adjusted AGI for this purpose.

Next, add the following to that adjusted AGI number:

  1. 50% of Social Security benefits
  2. Any tax-free municipal bond interest income
  3. Any tax-free interest on U.S. Savings Bonds used to pay college expenses
  4. Any tax-free adoption assistance payments from your employer
  5. Any deduction for student loan interest
  6. Any tax-free foreign earned income and housing allowances, and certain tax-free income from Puerto Rico or U.S. possessions

Now you know your provisional income. 

Determine your tax scenario

After calculating your provisional income, it’s time to determine which of the following three scenarios you fall under.

  1. All benefits are tax free

If your provisional income is $32,000 or less…

and you file a joint return with your spouse, your Social Security benefits won’t be subject to federal income tax. You may still need to pay state tax. 

If your provisional income is $25,000 or less…

and don’t file jointly, your Social Security benefits are generally federal-income-tax-free. However, if your spouse lived with you at any time during the year and you filed separately, you’ll need to report up to 85% of your benefits as income UNLESS your provisional income is zero or negative.

  1. Up to 50% of your benefits are taxed

If you file jointly with your spouse and have a provisional income between $32,001 and $44,000, you must report up to 50% of your Social Security benefits as income on Form 1040.

If your provisional income is between $25,001 and $34,000, and you don’t file a joint return, you must report up to 50% of your benefits as income.

  1. Up to 85% of your benefits are taxed

If you file jointly with your spouse and your provisional income is above $44,000, you must report up to 85% of your Social Security benefits as income on Form 1040.

If you don’t file a joint return and your provisional income is above $34,000, you will likely need to report up to 85% of your Social Security benefits as income.

Unless your provisional income is zero or a negative number, as mentioned earlier, you’ll also need to report up to 85% of your benefits if you’re married and file separately from a spouse who lived with you at any time during the year.

Questions? Smolin can help

Believe it or not, this is only a very simplified explanation of how Social Security benefits are taxed. Many nuances are involved, and the best way to learn how much, if any, Social Security you’ll need to report as income is to consult with your accountant.

Read This Before Listing Your Property as a Vacation Rental

Read This Before Listing Your Property as a Vacation Rental
Read This Before Listing Your Property as a Vacation Rental 850 500 smolinlupinco

Whether you own a lakefront cottage, vacation beach home, or ski chalet, renting out your property for part of the year can have significant tax impacts.

Here’s what you need to know.

Your level of personal use impacts your taxes

The number of days the property is rented has a direct impact on your taxes.

However, there are certain scenarios that don’t count towards this total since your official “personal use” of the property includes more than your own vacations. It also includes vacation use by your relatives—even if you charge them market-rate rent. It also includes use by nonrelatives if you don’t charge them a market rate rent.

This is important because if you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all.

Under these circumstances, you could see significant tax benefits since even a significant amount of rental income received won’t be included in your income for tax purposes. However, you also won’t be able to deduct operating costs or depreciation﹘only property taxes and mortgage interest. 

(Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you do rent the property out for nonpersonal use for more than 14 days, the rent received must be included in your income and you will be able to deduct operating costs and depreciation (subject to several rules). To do this, you’ll need to allocate expenses between rental days and personal use days.

For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days). You would allocate 75% of your maintenance, utilities, insurance, etc. costs to rental. Additionally, you would allocate 75% of your depreciation allowance, interest and taxes for the property to rental. The personal use portion of taxes is separately deductible. If the personal use exceeds the greater of 14 days or 10% of the rental days, the personal use portion of interest on a second home will also be deductible. In this case, though, depreciation on the personal use portion isn’t allowed.

Income and expenses

When rental income is greater than allocable deductions, you’ll need to report both in order to determine how much rental income you should add to your other income for tax purposes. 

When you may claim a loss

If the income is lower than the expenses and you don’t use the property personally for more than 14 days or 10% total percent of rental days, you could be able to claim a rental loss.

When calculating the loss, though, you must allocate your expenses between the rental and personal portions. It’s also important to keep in mind that the loss will be considered “passive” and may be limited under the passive loss rules.

When you cannot claim a loss

If rental income is higher than expenses or if the house is used personally for 10% of rental days or more than 14 days total (whichever is greater), you won’t be able to claim a loss. However, you’ll still be able to use your deductions to balance out rental income. Any unused deductions will be carried forward. This could be usable in future years.

While there are still multiple deductions up to the amount of rental income you can claim, you must use them in this order: 

  • Interest and taxes
  • Operating costs
  • Depreciation

Questions? Ask Smolin

Tax rules for vacation rentals can be complicated. If you plan to rent out your property, it pays to plan ahead. Contact your Smolin accountant to learn how you may be able to maximize deductions in your unique situation.

Estate Planning Don’t Forget the Generation-Skipping Transfer (GST) Tax

Estate Planning? Don’t Forget the Generation-Skipping Transfer (GST) Tax
Estate Planning? Don’t Forget the Generation-Skipping Transfer (GST) Tax 850 500 smolinlupinco

Would you like to include grandchildren, great grandchildren, or nonrelatives who are significantly younger than you in your estate plan? If so, you’ve got more to consider than gift and estate taxes. The generation-skipping transfer (GST) tax may also apply.

GST Tax Basics

One of the harshest taxes in the Internal Revenue Code, the GST tax is a flat 40% tax on asset transfers that “skip persons”. For example, the tax may apply if you plan to leave assets to grandchildren or other family members who are more than one generation below you. (For non-family members, the tax applies when the heir in question is more than 37 ½ years younger than you.)   

Because this tax is calculated in addition to estate and gift taxes, it can significantly impact the amount of wealth you’re able to leave to future generations. 

GST Tax Exemption Under the Tax Cuts and Jobs Act

A generous GST tax exemption may fortunately offer some relief. For persons dying after December 31, 2017 and before January 1, 2026, the Tax Cuts and Jobs act adjusts the GST tax exemption amount to an inflation-adjusted $10 million. That totals $13.61 million for 2024.

Unless congress takes action before this time frame ends, the exemption will shrink back to an inflation-adjusted $5 million starting on January 1, 2026.

Of course, taking advantage of this exemption requires careful planning.

For an exemption to apply in some cases, it’s necessary to allocate the exemption to particular assets on a timely filed gift tax return. This is called an affirmative election.

In some cases, the exemption may be allocated automatically unless you opt out. If you prefer to allocate your exemption elsewhere, this can lead to unwanted results.

Reviewing each transfer for potential GST tax liability is a great way to avoid costly mistakes and ensure your exemption is allocated as advantageously as possible.

What transfers are taxable under the GST?

In addition to direct gifts that skip persons, GST tax applies to two types of trust-related transfers: 

  1. Taxable terminations

Trust assets pass to your grandchildren when your child dies and the trust terminates.

  1. Taxable distributions

Trust income or principal is distributed to a skip person.

Note: Gifts covered by the annual gift tax exclusion aren’t currently subject to the GST tax. 

Protections offered by automatic allocation rules

While the automatic allocation rules can be unfavorable if you prefer to allocate your exemption elsewhere, they’re ultimately intended to protect you against unintentional loss of GST tax exemptions.

For instance, your unused GST tax exemption may be automatically applied to a gift to a grandchild or other “skip person” that exceeds the annual gift tax exclusion ﹘without the need to make an allocation on a gift tax return. 

The rules’ impact on “GST trusts” are complex. In general, a trust is considered a GST trust if it will likely benefit skip persons or your grandchildren in the future.

In most cases, these automatic allocation rules work favorably and ensure your GST tax exemption is applied where it’s most needed. However, they can also lead to unintended﹘and potentially expensive﹘results in other cases.   

Questions? Smolin can help

For many people, the GST tax might not be top of mind right now. After all, the exemption amount is currently high enough that it doesn’t impact most families’ estate plans. 

However, the GST tax exemption rate is expected to decrease significantly after 2025 without action from congress. 

By choosing to contact your accountant to plan for this tax now, you can avoid unexpected costs and protect the wealth you want to leave to your younger relatives in the future. 

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