It wasn’t too long ago the advisor community was scrambling to address what many intelligent advisors thought was imminent sweeping tax legislation.
I remember internal discussions with the advisor team here, evaluating ways to plan for potential increases to the capital gains tax and the potential estate tax exemption getting cut in half. The concern was justified because of a political shake up in the House of Representatives, the Senate and the White House. We were bracing for a short order, substantial change to the tax code we have grown accustomed to navigating.
Surprisingly though, the biggest tax story to date has been what hasn’t happened.
No billionaires tax, no change in the top income tax bracket, no increase in the capital gains tax rates, and no decrease to the lifetime estate tax exemption. The only changes thus far in the tax laws have gone the complete opposite direction of what everyone was expecting!
In fact, the estate tax exemption increased for 2022. With the latest increase for inflation, individuals can now gift a whopping $12.06 million without paying a dime in tax. For married couples filing a joint return, the exemption is $24.12 million.1 This is the highest estate tax exemption amount there has ever been.
The long-term capital gains tax rate is still just 15% for married taxpayers filing a joint return, all the way up to $517,200 of taxable income in 2022.2
Contrary to what was anticipated just one year ago, stock market performance in addition to the lack of tax change has created arguably one of the most favorable times in history for wealthy households.
That being said, it’s not time to sit back and delay taking action. It is time to accelerate action because the lack of policy change has extended what, for some, will be a once in a lifetime opportunity to build and preserve wealth.
It is time to accelerate action because the lack of policy change has extended what, for some, will be a once in a lifetime opportunity to build and preserve wealth.
How Do You Take Action?
Go back to one of the most important questions in investing: What is your time frame with the money you are investing?
If there is one certain weakness the government has regarding tax legislation, it’s short sightedness. It’s this short sightedness that forces lawmakers to welcome tax strategies such as Roth IRA conversions. This is because Roth conversions raise tax money today that is desperately needed to fund high levels of government spending.
A Roth conversion involves moving assets from a pre-tax retirement account to an after-tax Roth IRA. You pay taxes on the assets that are moved. Once those assets are in the Roth IRA for 5 years and you reach age 59.5, however, those assets and all of the growth can be distributed tax free. Even more attractive for some, there is no required minimum distribution (RMD) obligation on Roth IRAs, for the life of the owner. Non-Spouse, non-eligible beneficiaries may be subject to RMD’s, but those distributions are also tax free.
Another potential strategy involves gifting. Gifting is a great way to keep assets in the family and potentially protect them from estate taxes. With the current gift tax limit so high, people can now move more wealth than ever to the next generation, or other important people in their lives. Although the annual gift exclusion amount is only $16,000 per person per year in 2022, you can exceed that amount and still pay no taxes on that gift by filing the appropriate tax form, to correctly disclose the use of your lifetime exemption.3
Moreover, Roth conversions and gifting strategies are not restricted by income figures like many other tax planning strategies. For this reason, these techniques in particular pose a potential value add for a large variety of people in many different scenarios.
Remember, the goal with any good tax planning strategy is to legally pay the least amount of tax over the planning horizon. For some people, the planning horizon is a year. For some people, the planning horizon spans multiple generations or longer. It is vital to apply your specific set of priorities, facts and figures to the current tax and investing environment.
What to Do Next
Now is a great time to discuss your planning horizon with your advisor. It makes more sense than ever to get the next generation of your financial plan involved. Communicating your values and intentions with heirs is most effective when it’s done early and often. You’d be surprised how important it is to children and grandchildren to uphold the values of their parents and grandparents.
But they can’t do that if they’re not informed. Tax rates are low relative to historical rates. We know that many significant tax rates are set to expire on December 31, 2025.4 Careful consideration should be given to determining if it makes sense to accelerate income into these next few years. After the close of the 2025 tax year, it may be a while before we see rates like these again. We look forward to speaking with you and others you want to involve in your investing and financial planning priorities.
Casey Pisano, CFP®
 fpPathfinder/Important Numbers
 Instructions for IRS Form 706 Rev. Sept. 2021
 Tax Cuts Jobs Act of 2017
The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change; you should consult your tax professional before engaging in any transaction.