Five Tax-Savvy Wealth Transfer Strategies

Get a jump on your 2023 taxes with these tips and insights

As 2023 comes to a close, tax filing season waits right around the corner. Rather than dreading its inevitable arrival, why not use this time to become better acquainted with savvy tax season financial strategies in the new year?

Depending upon your unique finances — we’ve provided strategies appropriate for individuals and families at a range of income levels, the tips provided in this article may help you:

• Lower your federal income tax obligations
• Set aside extra money for retirement
• Reserve funds earmarked for education and health care costs
• Reduce future estate taxes for your heirs and beneficiaries

Curious to learn more? Let’s take a closer look at five common strategies and how they might apply to your 2023 federal income tax filing.

1. Contribute to tax-deferred accounts (e.g., a Traditional IRA or Health Savings Account)

Odds are good that you know you may deduct some or all of your contributions to a Traditional Individual Retirement Account (IRA).¹ By contributing to a tax-deductible retirement account now you may not only save money for your future but also reduce your current tax bill.

For 2023 and according to the IRS, the total contributions made to all of your Traditional IRAs (and Roth IRAs, which don’t offer tax deductible contributions²) cannot exceed the following amounts³:

• $6,500 ($7,500 if you’re aged 50 or older), or
• If less, your taxable compensation for the year

Wondering if you have the right IRA or other investment solutions in place for the current tax year? An experienced financial advisor can help you become more informed about navigating these issues, which may give you more confidence to take action.

Remember: For 2023, you have until Tax Day (Monday, April 15, 2024) to add funds to a Traditional or Roth IRA. (Per the IRS, this date does not include filing extensions.)

The tax benefits of Health Savings Accounts (HSAs)

Do you have a high-deductible health plan (HDHP)?⁴ Do you spend a lot of money on health care deductibles, insulin, medical supplies or similar items? If so, you may want to consider the potential benefits of contributing to a tax-advantaged Health Savings Account (HSA).⁵

Although often overshadowed by IRAs and employer-sponsored 401(k) plans in financial planning conversations, HSAs can help reduce your overall tax burden while also setting aside funds in a tax-deferred account to cover your or your family’s personal needs.

Plus, with inflation and rising health care costs nationwide, many people find HSAs financially beneficial — especially in households where a sizeable portion of income is spent on chronic health care matters.

For fiscal year 2023, the IRS allows for the following deductions,⁶ which are slightly higher than in 2022:

• The annual limit on deductions with individual coverage under a high-deductible health plan is $3,850.
• The annual limit on deductions for family coverage under a high-deductible health plan is $7,750.
• Individuals aged 55+ can contribute an additional $1,000 as a catch-up contribution.

Looking ahead to 2024, it’s worth noting that the IRS will boost further⁷ (and by an unprecedented amount) how much people can contribute to their HSAs:

• The maximum individual contribution to an HSA will be $4,150.
• The maximum family contribution to an HSA will be $8,300.
• Individuals aged 55+ can continue to contribute the additional $1,000 as a catch-up contribution.

Remember: Although any investment growth within an HSA account is tax-free, withdrawals are only tax-free for eligible medical expenses. If funds placed in an HSA are used in other ways, they may become taxable. A tax attorney or accountant may help you navigate questions around this topic.

2. Invest in education

There can be tax advantages to paying for educational costs, be it through popular savings plans for children or grandchildren or less-discussed tax credits for adult learners:

• For individuals seeking to cover someone else’s education, an education savings plan is an option. With a Section 529 Education Savings Plan⁸ (more commonly known as a 529 plan but sometimes referred to as a Qualified Tuition Program), you can set aside money for a child or grandchild’s future education expenses. Although 529 contributions are not tax deductible at the federal level, some states consider contributions tax deductible. Alas, as Texas doesn’t have individual income tax, this isn’t an option for most RBFCU members.

  You may be wondering: “If there’s no immediate tax deduction, what’s the tax advantage of a 529 plan?” Think of a 529 plan as a long-game wealth transfer strategy. Contributions to the fund grow tax-free and – provided the money goes toward eligible education expenses – no income taxes are paid upon distribution.

  Allowed instances where money from a 529 may be spent include elementary, middle, high school, college and university (private, public or religious) tuition (certain limitations may apply) as well as most associate-degree, trade and vocational schools. For a closer look at the advantages of 529 plans (a.k.a. Qualified Tuition Programs) – including additional benefits for the beneficiary, visit the IRS website.⁹

• For individuals interested in tax breaks for their own educational costs, tax credits are worth exploring as tax season approaches, although certain criteria must be met in order for an individual to qualify for the American Opportunity Tax Credit (AOTC)¹⁰ or the Lifetime Learning Credit (LLC).¹¹

A word about 529 plans and gift tax exclusions

Although the IRS does not impose federal contribution limits to 529 plans, however, consider the annual gift tax exclusion amounts.¹²

For 2023, the annual gift tax exclusion has increased to $17,000 per person, per beneficiary (a couple can give a combined $34,000 to each beneficiary). Beyond that amount, the donor may be required to report to the IRS and pay taxes on the gift.

One option, however, that many parents and grandparents explore is “superfunding” a 529 plan. Using a 5-year gift tax average (currently $85,000 for a single contributor or $170,000 for a couple), the IRS will allow you to make a one-time lump sum gift to someone’s 529 plan.

Be aware that, if you choose to take full advantage of the five-year spread for 529 plans, then you might not be able to give additional gifts to the beneficiary during the five-year period without being obligated to file a gift tax return — unless the IRS were to increase the gift tax exclusion in the interim, such as through an inflation adjustment in a subsequent year.

Tip: If you plan to make a significant 529 contribution to one or more individuals, it may be worthwhile to have a conversation with your tax professional (e.g., attorney, CPA) or financial advisor before taking any action.

3. Make a philanthropic contribution

A common end-of-year strategy to reduce one's overall tax burden is to donate cash or other assets to a qualifying non-profit organization through charitable giving. This could be in the form of a contribution from yourself or in the name of a loved one, such as for a holiday gift for your favorite “person who has everything.”

For many of us, philanthropy is a way to connect our money to work being done in the world that’s in alignment with our core values and beliefs. And it’s a means of sharing your wealth that may help reduce what you owe to the IRS while benefiting a beloved non-profit community organization, alma mater or international aid charity.

Some charities and community foundations accept donations of highly appreciated assets like stock and real estate, which can help you avoid hefty capital gains taxes. For more affluent individuals and families, larger philanthropic gifts of money or other assets may reduce an estate’s size significantly, perhaps lowering the tax burden on your other beneficiaries. (More on estate taxes in a moment.)

Whatever philanthropic approach you take, be sure to carefully file receipts and other documents related to your contribution(s) for reference when it comes time to prepare your tax forms.

Tip: The IRS maintains a list¹³ of tips to help ensure your charitable contributions pay off for you on your tax return.

4. Give gifts of money

Did you know that the federal estate tax rate typically is 40% on the largest estates? For most of us, that number won’t be an issue, but if you’re fortunate to live in a high-net worth household, then you may want to use tax season to consider carefully:

• How much money you gave away in 2023 to friends and family when preparing your tax forms
• Whether you have the right plans in place to eventually distribute your estate via wealth-preserving strategies

By transferring wealth to heirs over time strategically (e.g., via 529 plans or annual gifts), you may be able to reduce the size of your estate at death and avoid federal estate tax.

The IRS’ inflation-adjusted numbers for the estate and gift tax exemption for 2023 mean that wealthy taxpayers can transfer more to their heirs tax-free during life — or at death.

There are two important federal rules when it comes to high-dollar tax-free gifting.

First, there's the annual gift tax exclusion. As mentioned above in relation to 529 plans, the annual exclusion amount for gifts has jumped to $17,000 for 2023, up from $16,000 allowed in 2022 as a tax-free gift. You can choose to give to as many people as you want during the year, with a separate $17,000 tax-free limit on the contributions to each person and no aggregate limit for you. And, no, a recipient need not be a family member.

Second, there is the federal lifetime estate exemption. The estate tax exemption increased temporarily to $12.92 million per individual in 2023, up from $12.06 million in 2022. The current exemption amount expires in 2025. At that point, it will revert to a much lower amount – unless the U.S. Congress makes that change permanent.

Remember: In households with significant wealth and assets scattered across the country, there may be state gift, inheritance or estate taxes to consider alongside federal income, gift and estate tax concerns. A tax advisor, attorney and/or financial advisor can be of assistance when considering tax matters.

5. Create a trust

Although there are many types of trusts (e.g., revocable living, testamentary, irrevocable, special needs) that can benefit people of all income ranges to advance specific goals, they can be of particular help to high- and ultra-high-net worth individuals and families who wish to reduce their estate’s value and potentially reduce federal and state estate tax bills.

In one scenario, you could transfer assets from your estate to a trust, bypassing your estate and possibly lowering the estate tax for your heirs. Depending upon how the trust is written, assets may be retained in the trust, deferring estate tax or included in a beneficiary's estate with reduced estate tax liability.

As income accrues on the assets held in the trust, you may not be personally responsible for paying taxes since the trust is considered a separate entity. The trust gets taxed directly on retained income, while beneficiaries are taxed on income distributions. If all trust income is distributed to the beneficiaries, the trust may owe no income taxes. This wealth transfer strategy typically works because beneficiaries are often in lower tax brackets.

When it comes to creating a trust and navigating federal income tax rules and regulations, you’ll want to create an estate planning team to help you chart the best course of action. This team may include an attorney, a financial advisor specializing in wealth management, an accountant and/or a trust officer.

The takeaway

Each year, federal income tax season offers people of every income level a chance to reflect upon their finances, goals and tax obligations and identify ways to potentially grow and protect their wealth.

Hopefully, with the strategies provided in this article, you have fresh insights into which ones might be worth exploring.

Whatever the season, remember that when it comes to tax-savvy wealth transfer strategies and other financial planning solutions, resources and tips, RBFCU Investments Group is here to help you make more informed choices with more confidence.

Let us know how we can assist you in the coming year — and beyond.

1-888-294-0202 | rbinvestments@rbfcu.org

Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial Services has a partnership with this financial institution to provide financial planning services and solutions to clients. The financial institution is not an investment client of Ameriprise but has a revenue sharing relationship with us that creates a conflict of interest. Details on how we work together can be found on ameriprise.com/sec-disclosure.

Clients contributing to a 529 Plan offered by a state in which they are not a resident, should consider, before investing, whether their, or their designated beneficiary(s) home state offers any state tax or other state benefits such as financial aid, scholarship funds or protection from creditors that are only available for investments in such state’s qualified tuition program.

RBFCU Investments Group is a financial advisory practice of Ameriprise Financial Services, LLC.

Ameriprise Financial and the financial institution are not affiliated.

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.

Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser.

Securities offered by Ameriprise Financial Services, LLC. Member FINRA and SIPC.

Sources:

The following sources were last accessed in August 2023.

^{1, 2} “Topic No. 451, Individual Retirement Arrangements (IRAs).” Irs.gov, https://www.irs.gov/taxtopics/tc451.

³ “Retirement Topics - IRA Contribution Limits.” Irs.gov, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.

^{4, 5} “Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans.” Irs.gov, https://www.irs.gov/publications/p969.

⁶ “26 CFR 601.602: Tax Forms and Instructions. (Also Part I, 1, 223; Part III, 54.9831-1).” Irs.gov, https://www.irs.gov/pub/irs-drop/rp-22-24.pdf.

⁷ Forms, 26 Cfr 601 602: “Administrative, Procedural, and Miscellaneous.” Irs.gov, https://www.irs.gov/pub/irs-drop/rp-23-23.pdf.

^{8, 9} “Topic No. 313, Qualified Tuition Programs (QTPs).” Irs.gov, https://www.irs.gov/taxtopics/tc313.

¹⁰ “American Opportunity Tax Credit.” Irs.gov, https://www.irs.gov/credits-deductions/individuals/aotc.

¹¹ “Lifetime Learning Credit.” Irs.gov, https://www.irs.gov/credits-deductions/individuals/llc.

¹² “Frequently Asked Questions on Gift Taxes.” Irs.gov, https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes.

¹³ “Eight Tips for Deducting Charitable Contributions.” Irs.gov, https://www.irs.gov/newsroom/eight-tips-for-deducting-charitable-contributions.