SAN DIEGO — We are nearing the end of 2019. And, there’s something significant to note about this year and 2020: There will likely not be any tax increases during these years. Currently, we are enjoying the lowest income tax rates in decades as well as the highest estate tax exemptions. Income tax rates range from 10% to 37% and capital gains tax ranges from 0% to 20%, while the estate & gift tax exemption is $11,400,000 per person! What does this have to do with you? Plenty! Especially if you have retirement accounts and/or are worth more than $2 million per person. Read on…
With Alternative Minimum Tax a rare occurrence these days, unless your taxable income is greater than $321,400 married or $204,100 single, your highest Federal tax rate will be 24%. On incomes higher than that, you have to reach over $612,350 married or $510,300 single to be subject to the highest bracket of 37%. Compare that to the year 2000, when the lowest tax rate was 15% and the highest rate was 39.6% – for taxable incomes of over $288,350 married or single! During the 1980s, the highest tax bracket was 50% – kicking in (during 1986) at incomes of only $175,250 married or $88,270 single. In fact, from 1965 to 1981, the highest tax bracket was 70%!
What I’m trying to say is that we are likely seeing the lowest tax rates we will ever see for years, if not decades. That is why Roth conversions between now and 2020 could make a lot of sense. Here’s a refresher: All of the money you hold in an IRA will be subject to full ordinary tax when you take draws. At age 70-1/2 and older, you MUST take draws in the form of required minimum distributions (RMDs). So, whether or not you need the money, you are forced to pay tax on your IRAs every year once you reach age 70-1/2. And, here’s a real bummer: Even if your kids inherit your IRA, they still have to pay tax on every dollar in it!
Contrast that with a Roth IRA: Once the money is in a Roth IRA, there is NEVER any future tax – not on earnings, not on draws and not for heirs. Also, you are not required to take RMDs from a Roth. It’s a great deal, right? So, between 2019 and 2020, it might be an ideal time to convert your IRAs to Roth IRAs. It’s a rare opportunity to pay taxes at a discount and then never pay tax on these accounts again!
Be sure to take this golden opportunity while the rates are low to consider Roth conversion!
On to the estate tax exemption. Many of you are thinking that individually or as a couple, your net worth is well under $11.4 million per person, so none of this applies to you. However, keep in mind that in 1997, the estate tax exemption was only $600,000 per person. The exemption didn’t reach $1 million until 2002. For years 2006 – 2008, the exemption was $2 million and between 2010 to 2018, the exemption ranged between $5 million and $5,490,000. The point of this is: A change in the law could mean many more people could be subject to estate tax!
Here’s how it works. Aside from the “freebie” of being able to give $15,000 per person per year, the estate exemption applies to gifts and inheritances. So, a single person who is worth $15 million at death, who gave away $5 million during his or her lifetime, has only $6.4 million left in exemption. That means a net of $8.6 million is subject to estate tax, costing the heirs 40%, or over $3.4 million!
Why does this affect you? Let’s say that you’re married and your total net worth is $5 million (counting your house, life insurance, investments and retirement accounts). If the estate exemption decreases (which, unless the law changes, it will no later than 2025) to $2 million per person, your heirs could end up paying $400,000 or more just to inherit your assets!
To avoid this scenario, you might want to consider gifting to your kids sooner rather than later! Let’s take another example. Say you are single and your net worth is $10 million. You don’t need all of that to provide for your retirement. If you wait until you die for your kids to get any money – and the estate exemption drops to $2 million, they could owe $3.2 million on the inheritance! If, you give away $5 million while the exemption deduction is high, in this example, your kids might only owe $2 million on the inheritance. (And, there are lots of other tricks to avoid estate tax, like partial gifts, qualified residence trusts and life insurance trusts.)
The bottom line is: If your net worth is even “just” over $2 million per person, you might want to think about doing some planning now!
As always, be sure to work with a qualified CPA, and/or attorney. Now is the time!
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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com