Politics, Elections, and Estate and Gift Taxes

Without question, taxes and spending will dominate the debates, campaigning, and November’s presidential and congressional elections. While former President Trump has not laid out a plan, he vows to renew his 2017 Tax Act when it expires on January 1, 2026. Trump has also said that he would like to eliminate the estate tax.

President Biden, however, has been quite specific. Regarding estate taxes, he wants to eliminate the step-up in basis when heirs inherit assets with capital gains. In fact, the estate would have to recognize the gain on the final estate tax return, and the same would happen when an annual or lifetime gift is made. He will continue the estate tax, but probably with a lower exemption amount and perhaps an increase from 40% to 50%. He wants to double the capital gains rate for those with $1 million or more taxable income.

Selling Your Home? What is the Tax Consequence?

In the old days, you did not pay capital gains when you sold your home and bought one of equal or greater value. However, if you bought a house of lesser value, the amount of capital gain not reinvested was taxed. But the good old days disappeared a long time ago.

Under current rules, when you sell your home the first $250,000 (single) and $500,000 (married) of your gain is tax-free, and any amount over this is taxed at a capital gains rate. How do you calculate your gain? Take the price you paid for the home, including any settlement costs plus additions/improvements, but not routine maintenance costs, to establish your cost basis. Your gain is the amount you sell the home for minus this cost basis.

Rules Around Loaning Money to Family

A family loan, or intra-family loan, occurs between relatives and is often less formal than traditional loans from banks or lenders. Lending money to family members can be both generous and potentially detrimental for either party. Let’s review some of the must-knows before you lend a family member money.

The lender and borrower should agree upon how they structure the loan. Since it is between family members, there’s no formal approval process so agreements could be as informal as a handshake. However, we strongly recommend using a formal written agreement or a promissory note outlining the loan’s terms to avoid any potential misunderstandings.

What are the tax implications for intra-family loans? You must ensure that the interest rate on the loan is not lower than the Applicable Federal Rate (AFR). The IRS updates these figures for loans with different maturities. The lender will also need to report the interest received as taxable income, while the borrower may deduct interest if it qualifies as mortgage interest.

The lender may forgive part of the loan balance as a gift but should be careful that the IRS does not classify it as a debt cancellation. Individuals can forgive up to $18,000 in 2024 without exceeding the annual gift tax exemption limit. 

Beat High Mortgage Rates with an Intrafamily Loan. Here’s How the Taxes Work. – WSJ

 Family Loans: How to Borrow from and Lend to Family – NerdWallet

Ready to Pay More for Medicare?

As previously discussed, Medicare predicts that its trust fund will run out of money in 2036. Obviously, this is on the minds of those on Medicare or soon will be, but it is also on the minds of the Millennials and Gen X cohorts. A recent survey by eHealth found that these folks are equally concerned…at least those who know what Medicare is.

What? Yes, only 30% could correctly explain Medicare, with 35% believing it was for children and 29% confusing it with Medicaid. For those who understood Medicare, a whopping 66% said they were willing to pay more to ensure that it would be available to them. By the way, 78% of those polled blamed the Baby Boomer generation for putting Medicare in danger because of their selfishness and fiscal irresponsibility.

What Will You Do With Inheritance?

Approximately $80 trillion will be transferred from Baby Boomers to younger generations. That is up from about $20 trillion passed down by the Boomers’ parents. According to a USA Today Blueprint survey, 68% of Gen Z and millennials expect an inheritance and somehow estimate receiving an average of $320,000. Usually, Mom and Dad don’t discuss inheritance at such a specific level, so some of this may be the younger generation just guessing. Amazingly, 54% thought that inheriting wealth only perpetuated wealth inequality in the U.S. Maybe they should tell Mom and Dad just to leave the money to charity. Most (76%) said they would add it to their savings, but 60% said they would use it to pay down debt, especially student loans and/or the mortgage.

Provise Webinar – Laying the Foundation: Understanding the Landscape of Education Costs

For those who missed our webinar series on navigating the complexities of funding your child’s or grandchild’s education, please visit our website to watch recordings of the first of three sessions. Or, click on this LINK for session #1 or this LINK for session #2. Oscar Skjaerpe, CFP®, shares practical ways to save, invest, and maximize financial aid for higher education.

Are Utilities the Hot Sector for 2024?

Long thought of as a sleepy sector for retirees, utilities are making headlines after going from the worst-performing sector last year to one of the best this year. Utilities often outperform the market during economic recessions and bear markets, but that’s not the case this year. Typically, investors are attracted to the sector for its consistent dividend income and stable (albeit slow) growth. However, investors are flocking to these “old economy” stocks for a different reason.

Aided by more efficient technology usage and conservation efforts, the business of providing electricity has not grown much in the last few decades. Advances in artificial intelligence (AI) are starting to shift that paradigm. AI requires massive amounts of computing power to produce and store data, which means the need for electricity is growing. The utilities sector is benefiting from this boom in AI, and Wall Street is catching wind. Earnings growth estimates for the next two years have increased an average of 11% since the end of last year, and the price that investors are willing to pay for those earnings (price-to-earnings multiple) has grown 3%, according to FactSet.

Ultimately, utilities provide a more prudent “pick and shovel” approach to participating in this revolutionary technological advance for those looking to benefit from the AI investment theme without paying high sticker prices for large-cap growth companies.

Stock-Redemption Plans Might Need to be Changes

When working with business owners we discuss the importance of planning for the sale of their business in case of premature death. Often, the owner uses a buy/sell agreement to sell the business, with potential buyers purchasing the business from the estate. The potential buyers play two roles: 1) purchasing life insurance on the business owner and 2) listing themselves as beneficiaries. The buy/sell agreement raises the buyers’ cost basis and reduces the capital gains tax when the buyer sells at some time in the future.

Another alternative is a stock redemption plan where the owner’s estate agrees to sell the stock back to the corporation. Again, life insurance is often employed with the company listed as the policy’s beneficiary. BUT, the recent Supreme Court decision, Connelly v. Internal Revenue Service, may turn stock redemptions on their head.

In this case, the 75% owner died, and the company received $3 million in life insurance proceeds to fund the stock redemption. The owner’s estate declared the $3 million transaction on the estate tax return. The IRS argued that because the insurance money was in the company, it increased the company’s value and the estate had to value the transaction at the fair market value of $5.3 million.

The United States Court of Appeals for the 8th Circuit agreed with the IRS, but the 9th and 11th Circuit sided with the estate in similar cases. Thus, it went to the Supreme Court, which upheld the 8th Circuit. Thus, if you have a stock redemption plan, you should speak with your financial planner, attorney, and accountant ASAP to determine your potential liability. We agree. We think this decision is unfortunate, but it is now the law of the land unless Congress makes a change in the tax law.

IRS Waives Required Distributions for Inherited IRAs

If you inherit an IRA whose owner died before the Required Beginning Date, you must withdraw all of the money by the end of ten years. However, over those ten years, you are not required to take any distributions, although it’s usually a good idea to do so to keep total taxes down.

However, if the IRA owner had started Required Minimum Distributions (RMDs), the IRS surprised the financial world several years ago by saying that the beneficiary had to continue to take an RMD each and every year. But for the fourth year in a row, the IRS has waived this requirement. Make sure to visit us and/or your tax advisor to determine whether it still makes sense to withdraw some amount even though you are not required to do so.

New Social Security Wage Base

Although it will not be official until the October calculation, the new Social Security wage base is set to increase to $176,700, according to the White House budget forecast. This represents a 4.8% increase.

Margie is Retired…Again

Back in October of 2005, Margie Negron joined the ProVise family as a Client Service Representative and, over the years, moved into various positions, including managing the department. In July 2021, she “retired” for personal reasons, primarily to help her ill mother. But mom got better, and Margie missed us, so she rejoined Provise nine months later. Last month, she retired again, and we are confident that she and Eddie are ready for retirement. We have mixed emotions. We cannot express enough appreciation to Margie for her contributions to ProVise and her enormous service to our clients over the past 19 years.



We hope you continue to stay safe and well.

Proudly and successfully serving our clients for over 38 years. As always, we encourage you to call or email us if you would like to discuss anything.

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