This year, significant upcoming changes to federal income tax laws need our attention because they might mean you should revisit your estate plan. While you may think you are immune to these changes, a closer look shows potential implications for many people in Colorado.
For example, if you own real estate in Colorado and have a second home or are beneficiaries of a trust in Colorado (such as a family trust, or an outlying trust), you need to be aware that there will be a significant decrease in the lifetime exclusion amount at the end of 2025. You also need to know about this if you are a higher-earning professional or business owner. To paint a picture of what could happen – if you are a business owner or higher-earning professional and you lose your spouse, the exclusion amount is cut in half and suddenly you could be well within the threshold of potential federal estate tax exposure.
The 2024 lifetime exclusion amount will drop considerably at the end of 2025, so right now we have an opportunity to use it or lose it at the current levels, which are significantly higher than they will be once the current levels sunset. Already, I am working with clients to look at their overall asset picture and making strategic moves to avoid any tax implications on their estate. We want to take steps now in 2024, because 2025 may be too late. Let’s look at these provisions to understand their impact on estate planning.
Understanding upcoming federal income tax changes
At the heart of these changes are exclusion amounts that will drop at the end of 2025. These present both challenges and opportunities for estate planning. The upcoming reduction in the lifetime exclusion amount means you may need to be proactive to capitalize on the current thresholds before they go down.
Federal income tax update for 2024:
• Lifetime exclusion amounts increased this year: Starting January 1 2024, the federal lifetime gift and estate tax exclusion amount jumped to $13,610,000 per person (or $27,220,000 for a married couple). This marks a $690,000 increase per person from 2023, offering more gifting opportunities even if you’ve maxed out your exclusion before.
• These lifetime exclusion amounts drop at the end of 2025: The lifetime exclusion amounts are set to decrease after 2025, dropping to a $5,000,000 base amount plus an inflation adjustment on January 1 2026, from the current $10,000 base amount. If you’re considering taking advantage of the current higher exclusion amounts, start planning now to ensure you don’t miss out.
• Annual exclusion amounts increased this year: As of January 1 2024, the federal gift tax annual exclusion rises to $18,000 per recipient (or $36,000 for a married couple), up by $1,000 per recipient from 2023. This is the amount you can gift per recipient per year without dipping into your lifetime exclusion or paying gift tax.
• Federal tax rates for estates and trusts stay the same: The highest federal estate, gift, and generation-skipping transfer (GST) tax rate remains at 40% for 2024. Additionally, the top federal income tax rate for estates and non-grantor trusts is 37% for taxable income over $15,200 in 2024.
• Federal estate tax portability stays the same: The option to transfer a decedent’s unused federal estate tax exclusion to the surviving spouse, known as “portability,” remains the same for 2024. This can be beneficial if the surviving spouse’s estate might exceed their available federal estate tax exclusion amount.
• Required Minimum Distribution (RMD) changes: Changes are affecting qualified retirement plan accounts, with the age for starting required minimum distributions now at 73 for individuals turning 72 after December 31 2022. Pre-death RMDs from Roth accounts in 401(k) and 403(b) plans are eliminated starting in 2024. Contact your plan administrator or financial advisor to understand how these changes affect you and compute your RMDs for 2024.
In light of these sweeping federal tax changes, we would encourage you to do a review of your current estate plan to identify gift and estate tax planning opportunities in 2024. Reach out to us to explore your options today by calling 720 457 4573 or emailing info@rockymtnelderlaw.com
