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  • Carolyn Bedi

Reforms to the Tax Code That Affect Retirement and Estate Planning

Updated: Jun 1, 2023

As a result of the Inflation Reduction Act (IRA), which became law in August 2022, as well as SECURE 2.0, tax provisions have been incorporated into the law. Lower-income household tax code changes will automatically take effect. Households of higher income and net worth may want to review their retirement and estate plans to see if changes are necessary. Beyond these two new initiatives, some existing tax laws will expire by December 31, 2025. All new and due-to-expire tax laws affect your current bottom line, retirement, and legacy planning.


Inflation Reduction Act (IRA)

The IRA addresses many issues, including:


· Climate Change

Incentivizing homeowners to add wind or solar power extend to 2032, with eligible homeowners qualifying for a 30% tax credit. Rebates for existing tax credits for purchasing new electric or other hydrogen fuel cell cars also extend to 2032. Qualifying car buyers receive a $7,500 tax credit at the point of sale. Qualifying sales of used electric vehicles for $4,000 have also been added.


· Healthcare

Subsidy expansion for health insurance under the Affordable Care Act receives an extension through 2025. Another provision opens the possibility for Medicare drug price negotiations.


· Corporate Taxation

Corporations earning more than one billion dollars in profits now have a minimum 15% tax based on the annual income of the corporation’s financial statement, not the taxable income. The IRA also adds a one percent tax on corporate stock buybacks based on the value of the shares.


· Expanded IRS Enforcement

The IRS will receive an additional $80 billion over ten years to boost tax collections by increasing audits and other tax enforcement actions.


SECURE 2.0 Act

The SECURE 2.0 Act is part of the Consolidated Appropriations Act (CAA) of 2023. It changes how you save for retirement by altering rules from the original Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. These changes seek to improve retirement savings options regarding accrual and withdrawing money from retirement accounts. The Act includes 92 new provisions that promote savings, incentivize businesses, and increase flexibility for retirement savings strategies. Effective dates for some of the provisions vary as some are effective immediately while others phase in over the next few years.


The SECURE 2.0 Act has Three Overarching Goals:

1. Empower people to save more for their retirement

2. Improve existing retirement rules

3. Lower the cost of setting up a retirement plan for employers


These goals address the need for retirement preparedness. Empowering individuals to close the retirement gap between what they have saved and should have saved will provide more flexibility upon retirement. If current projections don’t change, US retirees will outlive their savings by an average of eight to twenty years, putting undo pressure on already strained federal assistance programs.


Raising the Starting Age for Required Minimum Distributions (RMDs)

The threshold age has increased from 72 to 73 for taking required minimum distributions from traditional IRAs and workplace retirement plans. In January of 2033, the RMD threshold will rise to 75. Additionally, the penalty for failure to take RMDs on time is halved from 50% to 25% of the undistributed amount.


Taking advantage of delaying RMDs will provide a larger withdrawal and potentially result in a higher tax liability in later years. An estate planning attorney or elder law attorney working with your financial advisor can help tailor distribution strategies before age 73 to mitigate tax consequences. Pursuing a more tax-diversified investment portfolio, including Roth IRAs and non-qualified holdings with unrealized capital gains that receive more favorable tax treatment, can preserve assets, generate later-life income, and help manage future tax liability.


Increase in Catch-up Contributions

You can set aside additional dollars over the standard maximum contribution to retirement plans like a 401(k) and IRA with a new proposal for catch-up contributions for age groups 62 to 64 and ages 60 to 63.


Yet another provision requires all catch-up contributions to be on an after-tax basis, except for those earning $145,000 or less. Other catch-up contributions will enable you to set aside more income in tax-advantaged retirement savings options while reducing current taxable income.


401(k) Auto-Enrollment

Auto-enrollment allows employers to enroll employees into a workplace retirement plan automatically. By 2025, an employee has to opt out of the program their employer provides rather than opting in. Participants can automatically defer 3% to 10% of their annual income into the retirement plan.


The Remaining 89 Provisions

An estate planning attorney or elder law attorney can help coordinate your strategies for the best possible retirement and legacy outcomes by interpreting many other provisions not mentioned in this article. Some of the more notable provisions include:


· Retirement plan contributions if you have student loan debt

· Rollover of a 529 Plan to balance a Roth IRA

· Roth’s employer plan changes

· Saver’s credit match

· Penalty-free early withdrawals

· New qualified charitable distribution rules (QCDs)

· New limits on qualified longevity annuity contracts (QLACs)


How these new provisions affect your retirement and estate planning is unique and will require some broad understanding of the laws and how they apply to your situation.


Tax Laws That Will Expire

Many tax laws will be sunsetting. They relate to the Tax Cut and Jobs Act (TCJA) provisions of 2017. As these sunset dates draw nearer, it’s crucial to leverage current tax laws and mitigate the impact of the changes on your retirement and estate planning.


2023 Tax Bracket Adjustments

After 2025, tax brackets will move higher.


· The current top tax bracket for individuals taxpayers, trust income, and estates of 37% will increase to 39.6%

· The current 24% rate will increase to 28%

· The current 22% rate will increase to 25%

· The current 12% rate will increase to 15%


Determine the potential benefits of maximizing pre-tax contributions to retirement plans and capitalize on the current lower tax brackets.


Dramatic Cuts in Unified Gift and Estate Tax Deductions

In 2026, tax deductions will reduce with a projected inflation-adjusted exemption of $6.8 million. Lifetime gifting strategies will become limited and impact certain estate planning and wealth transfer strategies at death.


Tax-efficient Planning in an Uncertain Economic Landscape

The economic environment continues to change considerably. Persistent higher inflation and interest rates play a part in the calculation when establishing Charitable Remainder Trusts (CRTs). Establishing this trust type at higher interest rates creates a potential tax advantage.


Summary

There is a narrow window of opportunity for higher-value individuals and estates to preserve and protect significant wealth. The IRA, SECURE 2.0 Act, sunsetting laws, and the limitless possibilities of more tax legislation passing Congress means taking strategic planning seriously. An estate planning attorney or elder law attorney can provide a comprehensive understanding of how current laws can be leveraged to protect your financial future and legacy.


We hope you found this article helpful. Please contact us today at (757) 222-5842 to schedule a consultation to discuss your legal matters. We look forward to the opportunity to work with you.

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