Tag Archives: deductions

Strategies to Pass on Wealth to Heirs

Strategies to Pass on Wealth to Heirs

Strategies to Pass Wealth to Heirs Individuals with significant assets should take advantage of proven tax strategies such as gifting and direct payments to educational institutions to transfer wealth to heirs tax-free, as well as minimize estate taxes. Additional opportunities are available as well, thanks to low interest rates and a volatile stock market.

Let’s take a look at some of them.

Gifting

The annual gift tax exclusion provides a simple, effective way of cutting estate taxes and shifting income to heirs. For example, in 2021, you can make annual gifts of up to $15,000 ($30,000 for a married couple) to as many donees as you desire. The $15,000 is excluded from the federal gift tax so that you will not incur gift tax liability. Furthermore, each $15,000 you give away during your lifetime reduces your estate for federal estate tax purposes. However, any amounts above this limit will reduce an individual’s federal lifetime exemption and require filing a gift tax return.

Direct Payments

Direct payments for medical or educational purposes indirectly shift income to heirs; however, it only works if the payments are made directly to the qualifying educational institution or medical provider. This strategy allows you to give more than the annual gifting limit of $15,000 per donee. For example, if you’re a grandparent, you can pay tuition directly to your grandchild’s boarding school, college, or university. Room and board, books, supplies, or other nontuition expenses are not covered. Similarly, they can make direct payments to a hospital or medical provider, but medical expenses reimbursed by insurance are not covered, however.

Loans to Family Members

This strategy works by loaning cash to family members at low interest rates, which is then invested with the goal of reaping significant profits down the road. With mid and long-term applicable federal rates (AFR) rates for October 2021, as low as 0.91 and 1.72 percent, respectively, heirs can lock in these rates for many years – three to nine years (mid-term) and nine to more than 20 years (long-term).

Grantor Retained Annuity Trust (GRAT)

Another relatively low-risk strategy is the grantor retained annuity trust (GRAT), where the donor transfers assets to an irrevocable trust and receives an annuity payment back from the trust each year. This strategy enables heirs to profit from their investments long-term if returns are higher than the IRS interest rate. Now that IRS interest rates are so low, this is easier than ever to do. In October 2021, the interest rate used to value certain charitable interests in trusts such as the GRAT is 1.00 percent.

Roth IRA Conversions

Contributions to a traditional IRA are made pre-tax, which means distributions are considered taxable income; however, the tax is paid upfront with a Roth IRA, and distributions are completely exempt from income tax. This feature makes converting a traditional IRA to Roth IRA and rolling it over to an heir an attractive option, especially during a financial crisis. The conversion is treated as a rollover where the trustee of the traditional IRA is directed to transfer an amount from the traditional IRA to the trustee of the Roth IRA. The account owner pays income tax on the amount rolled over in the year the account is converted, which allows the account to accumulate assets tax-free and future distributions are tax-free.

To learn more about these and other tax strategies related to wealth management, please call Lahrmer & Company LLC at (866) 474-1238 or email office@lahrmercpa.com and speak to a tax professional who can assist you.

Which Educator Expenses Are Tax Deductible?


Educators deduct school supplies
Teachers and other educators should remember that they can deduct certain unreimbursed expenses such as classroom supplies, training, and travel – even when schools switched to hybrid or remote learning models during the pandemic last spring. Deducting these expenses helps reduce the amount of tax owed when filing a tax return.

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401k rollover

Changing Jobs? Don’t Forget About Your 401(K)

401kOne of the most important questions you face when changing job is what to do with the money in your 401(k) because making the wrong move could cost you thousands of dollars or more in taxes and lower returns. Continue reading

small business owner

10 Smart Tax Tips for Small Businesses in 2021

small business taxesTo run a successful small business, there are a few tax tips every owner should know to help save money and minimize their tax liability. Here are our top ten tips: Continue reading

seasonal worker

Tax Withholding for Seasonal and Part-Time Employees

Many businesses hire part-time or full-time workers, especially in the summer. The IRS classifies these employees as seasonal workers, defined as an employee who performs labor or services on a seasonal basis (i.e., six months or less). Examples of this kind of work include retail workers employed exclusively during holiday seasons, sports events, or during the harvest or commercial fishing season. Part-time and seasonal employees are subject to the same tax withholding rules that apply to other employees. Continue reading

capital gains tax

Capital Gains Tax on Sale of Stocks

capital gains taxApps like Robinhood make it easy for everyone to play the stock market. If you’re a retail investor who made money last year buying and selling stocks, you may owe capital gains tax when you file your tax return this year. If you lost money, you may be able to deduct that loss and reduce your income. Continue reading

business taxes

Small Business Tax Roundup

business ownerTax changes due to recent legislation such as the Tax Cuts and Jobs Act and the CARES Act affect both individual taxpayers and small businesses. In 2020, the IRS issued several guidance documents and final rules and regulations that clarified several tax provisions affecting businesses. Here are five of them: Continue reading

second home ownership

Renting Out a Second Home

second homeIn general, income from renting a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income and Loss. You should also keep in mind that the definition of a “vacation home” is not limited to a house. Apartments, condominiums, mobile homes, and boats are also considered vacation homes in the eyes of the IRS. Tax rules on rental income from second homes can be confusing, especially if you rent the home out for several months of the year and use the home yourself. Continue reading

covid-19 tax relief

The COVID-Related Tax Relief Act of 2020

covid tax reliefThe Consolidated Appropriations Act, 2021, H.R. 133 included funding for the government, extensions for expiring tax extenders, tax relief under the COVID-related Tax Relief Act of 2020, and many more items. Passed by both the House and Senate, it was signed into law by President Trump on December 27, 2020. Continue reading