2023 Updates on Tax, Estate and Gift Planning

2023 Updates on Tax, Estate and Gift Planning

Authored by Mark Lobb

Along with California: “The Good, The Bad and The Ugly”

Last year saw the demise of the Build Back Better act which promised increased taxes and the gutting of traditional estate planning. Significant changes in tax and estate planning are not likely to occur in 2023 at the federal level.  States such as California continue to impose new taxes through every means possible.  The business migration away from California continues.

In 2022, the state with the fastest growing population was Florida, followed by Idaho, South Carolina, Texas, South Dakota, Montana, Delaware, and Arizona.  In droves, Californians moved to Texas, Florida, Washington, Tennessee, Arizona, Oregon, and Nevada.  It was reported in December of 2022 that between 2021 and 2022, California lost 340,000 more people than gained in population.  Scores of companies also announced plans to relocate operations and employees to states other than California including Chevron, American Airlines and Lucas Oil Products.  High taxes, high cost of living and a host of other issues plague the Golden State.

Our firm’s Business Migration group continued to be very busy in 2022.  All indications point to an even more robust 2023 migration.  Whether your company is staying put this year or starting to transition to another state, below is some information you should find helpful:

Federal Filing Deadlines

The following deadlines for 2023 are national deadlines which may not apply to certain areas of the country such as California.  Adjusted deadlines are discussed below in this section:

  • January 31, 2023: W-2’s are due to be provided by Employers.
  • March 15, 2022: Partnership and S corporation returns for calendar year 2022.
  • April 18, 2023: Deadline to file individual tax returns and returns for calendar year C- corporations.
  • April 18, 2023: First quarter 2023 estimated tax payment due.
  • April 18, 2023: Last day for individuals to make 2022 IRA and HAS contributions.
  • May 16, 2023: Not-for-profit returns due for calendar year 2021.
  • June 15, 2023:2nd quarter 2023 estimated tax payment due.
  • September 15, 2023: Third quarter 2023 estimated tax payment due.
  • September 15, 2023: Extended returns for partnerships and S- corporations due.
  • October 16, 2023: Extended individual tax returns due.
  • October 16, 2023: Extended calendar year C-corporation returns due.
  • January 15, 2024: Fourth quarter 2022 estimated tax payment due.

The IRS and the California Franchise Tax Board have adjusted the filing dates for certain counties in California due to the recent storms.  The IRS website identifies all of the counties, but the bulk of southern California is included.   On May 15, 2023, the following will be due:

  • 2022 individual income tax returns.
  • 2022 business returns which would normally be due on March 15, and April 18, 2023.
  • IRA and HSA contributions.
  • 2022 fourth quarter estimated payments due on January 17, 2023, and 2023 first quarter estimated payments due on April 18, 2023.
  • Qualifying farmers who normally file returns by March 1.
  • The 45- and 180-day deadlines for IRC section 1031 exchange transactions have been extended.

Adjusted Tax Brackets for 2022

For tax year 2022, inflation-adjusted federal tax brackets for individuals are as follows:

  • 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly);
  • 35%, for incomes over $231,250 ($462,500 for married couples filing jointly);
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly);
  • 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).

Tax Items of Interest

  • Itemized Deductions: There is no limitation on itemized deductions in 2023.
  • Alternative Minimum Tax: The Alternative Minimum Tax exemption amount for tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300).
  • Charitable deductions. For 2022, you can deduct up to 60% of your adjusted gross income (AGI) in qualified charitable donations if you plan to itemize your deductions.
  •  

Estate Planning

The annual gift tax exclusion amount has increased in 2023 from $16,000 to $17,000 per donor which means $34,000 for married couples. This adjustment will take effect for gifts of a present interest made on or after January 1, 2023.

The unified lifetime federal gift and estate tax exemption increases from $12,060,000 for 2022 to $12,920,000 for 2023. For the gross value of an estate above the exemption amount, a flat tax rate of 40% is imposed.

Absent congressional action, the exemption amount is scheduled to revert to approximately half of the current exemption amount on January 1, 2026.

Many of our clients created irrevocable grantor trusts in 2021 but did not fund their trusts. We are advising our clients to hold off on proceeding with any installment sales into irrevocable trusts or using the lifetime exemption for completed gifts if the desire is to eliminate estate tax for the following reasons:

  1. Interest rates are high and will likely go higher in the first three quarters of 2023.  The rates likely will start to go down at the end of 2023 and 2024.  It may be prudent to wait until the rates go down.
  2. Smart people are predicting a recession in the fourth quarter of 2024.  We have already experienced a decrease in value with some capital assets.  If values are going to decrease further, then waiting until we get into the recession will assist in freezing the values of assets at a lower value or maximize gifting opportunities.
  3. It is unlikely any laws will be passed in Washington in the next two years which will affect grantor trusts or the lifetime exemption.  There is no reason to rush to fund irrevocable trusts for estate tax purposes.

If you deem to fund irrevocable trusts for reasons other than estate tax optimization, we recommend the following:

  1. As stated above, interest rates will likely go up in the early part of 2023.  If you are going to do an installment sale, you should proceed as soon as possible to lock in on a lower rate.
  2. If lifetime exemption is to be used for completed gifting, cherry pick assets.  Be very strategic in which assets are to be funded into trust.
  3. Make a calculated decision on the installment sale interest rate. The short-term rate is not always the best choice.

California
“The Good, The Bad and The Ugly”

The Good

  1. The Cost of Hamburgers and Burritos: Last year I wrote an article about the projected cost of food served in restaurants soaring due to a new law affecting wages for restaurants called the Fast-Food Accountability and Standards Recovery Act (“FAST”) which was signed into law by Governor Newsome in September of last year.  On January 13, 2023, a Sacramento County Superior Court judge issued a preliminary injunction to stop FAST from taking effect, pending a vote by California voters.

    If allowed to take effect, FAST would have established a Fast-Food Council (“Council”), consisting of 10 unelected members, to determine minimum wages and workplace standards for fast food industry workers. The law was challenged by a coalition entitled Save Local Restaurants (Save), comprised of business owners, restaurateurs, franchisees, employees, consumers, and community-based organizations.

    Save is backing a statewide effort to overturn FAST through a referendum on the California ballot in November 2024. If and when the referendum qualifies for the ballot, the law will be put on hold until voters have a say in November 2024.

  2. Single Payer Healthcare: Last year I reported on a proposal known as CalCare which would possibly replace Medicare, Medicaid, and private health insurance with a state-run system.  The proposal died in 2022 without coming up for a vote.

    Assembly Member Ash Kalra was the bill sponsor. It was his decision to not bring the bill to a vote in the Assembly.  He withdrew the bill because he did not have enough votes for it to pass.

    Aside from debates over the government fully controlling health care, the bill was going to be funded by substantial new taxes on businesses and individuals which would have been devastating.  The taxes included a new 2.3% excise tax on business with more than $2 million in annual gross receipts, employers with 50 or more workers would incur a 1.25% payroll tax on total wages, and workers would pay additional progressive taxes based upon income levels maxing out at 18.05%.

  3. Net Operating Losses: California taxpayers may now deduct net operating losses (NOLs) on the 2022 tax return.  Suspension of NOLs started as a part of the state’s 2002-2003 budget.  The suspension was extended many times to cover projected budget deficits.  Ironically, in a year of a budget deficit, the suspension is lifted as a part of 2022 legislation.
    • Be mindful that you are not afforded an extended carryover period unless the NOL deduction would have produced a tax benefit were it not for the deduction suspension.
    • Utilize California NOLs “siloed” in legal entities on a combined group basis.
  4. Weather: A lot of irresponsible behavior regularly practiced in Sacramento has a “but we have nice weather” chaser.  During the middle of what appeared to be run-away inflation in 2022, California increased the fuel tax.  Citizen complaints were muted.  Indeed, California has nice weather.  On a quick online search, I found this ranking:
    1. California
    2. Hawaii
    3. Texas
    4. Arizona
    5. Florida
    6. Georgia
    7. South Carolina
    8. Delaware

    A lot of states may have no income tax and Arizona can brag all day long about a flat 2.5% flat tax, but my goodness, California has nice weather.

The Bad

  1. California Estate Planning and Taxation: Governor Gavin Newsom submitted his proposed budget on January 10, 2023.   The budget includes a proposal requiring net income derived from incomplete non-grantor trusts to be subject to California income tax if the grantor of the trust is a California resident.  It is projected to raise tax revenues of $30 million in 2023-24 and $17 million annually thereafter.
  2. Mansion Tax: California governments continue to pass unique taxes to raise revenue.  Los Angeles and Santa Monica are the most recent municipalities to pass into law a “Mansion Tax.”  They join San Francisco which has a rate of 6% on transfers of real property over $25 million, San Jose which now has a tax rate of 1.5% on transfers over $10 million, and Culver City which now has a tax rate of 4% on transfers over $10 million.
    In Los Angeles the voter-approved measure imposes a 4% tax on sales of property valued at more than $5 million, increasing to 5.5% on property worth more than $10 million. This tax is on any property sold and not just “mansions.”

    Santa Monica already had a transfer tax on the sale of property, but recently approved an additional tier.  Beginning March 1, 2023, tax at a rate of 5.71% will apply when the gross value is $8 million or greater.

    Jason Oppenheim of the Oppenheim Group estimates the 4 and 5.5 percent taxes under the LA measure amount to 20 to 30 percent of developer profits. “So those developers will choose to develop in other luxury communities where they won’t have to pay the tax, such as Beverly Hills, West Hollywood or Newport Beach.”

    Shane Phillips who is the Housing Initiative Project Manager for UCLA’s Lewis Center, is also quoted stating “developers building new, mixed-income multifamily construction should be exempt from the tax, or else they might be discouraged from building such housing. As it stands, developers who buy land for less than $5 million and then construct multifamily housing on it, likely pushing its value above $5 million, would owe the transfer tax whenever they sell the property.”

    The “mansion” taxes are one of the many new taxes hitting Californians in 2023.

The Ugly

A Wealth Tax Act was introduced on January 19, 2023, by Democrat Assembly member Alex Lee as Assembly Bill 259 and Assembly Constitutional Amendment 3.  If passed into law, this wealth tax will impose an annual 1.5% tax on worldwide net worth above $1 billion, starting as early as 2024. In 2026, the threshold for being subject to the wealth tax rate will fall to $50 million, with a 1% annual tax on wealth that rises to 1.5% for billionaires.

The proposal also includes provisions allowing the state to pursue wealth taxes from former California residents who may have built their wealth in California but later moved out of State.

To pass into law, the legislation will require two-thirds approval in both houses of the California State Legislature. The related constitutional amendment to raise the cap on taxing personal property will require a separate two-thirds approval from both houses. The proposal would then go before California voters.

Assembly Member Lee should chat with economists in France. France passed a wealth tax which led to an exodus of France’s richest. It is estimated the country experienced a net outflow of more than 60,000 millionaires between 2000 and 2016. France lost not only the revenue generated from the wealth tax, but all taxes including income tax and value added tax.

French economist Eric Pichet estimates the wealth tax cost France almost twice as much revenue as it generated. He concludes the wealth tax caused an annual fiscal shortfall of €7bn and reduced gross domestic product growth by 0.2 per cent a year.

California was not the only state proposing a wealth tax last week.  California was joined by Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York, and Washington.

California already has a problem with wealthy people leaving the state.  Increasing taxes on the wealthy is not the answer. Studies show the top 1% of taxpayers pay about 50% of state income taxes in California, New York and elsewhere.  An exodus of wealthy residents will be extremely detrimental to California.

With the plethora of tax updates and changes coming both on the state and federal levels, it is important to review your 2023 tax and estate planning that may be affected.  We will continue to keep you informed on any news we hear throughout the year.

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2023 Updates on Tax, Estate and Gift Planning

Authored by Mark Lobb

Along with California: “The Good, The Bad and The Ugly”

Last year saw the demise of the Build Back Better act which promised increased taxes and the gutting of traditional estate planning. Significant changes in tax and estate planning are not likely to occur in 2023 at the federal level.  States such as California continue to impose new taxes through every means possible.  The business migration away from California continues.

In 2022, the state with the fastest growing population was Florida, followed by Idaho, South Carolina, Texas, South Dakota, Montana, Delaware, and Arizona.  In droves, Californians moved to Texas, Florida, Washington, Tennessee, Arizona, Oregon, and Nevada.  It was reported in December of 2022 that between 2021 and 2022, California lost 340,000 more people than gained in population.  Scores of companies also announced plans to relocate operations and employees to states other than California including Chevron, American Airlines and Lucas Oil Products.  High taxes, high cost of living and a host of other issues plague the Golden State.

Our firm’s Business Migration group continued to be very busy in 2022.  All indications point to an even more robust 2023 migration.  Whether your company is staying put this year or starting to transition to another state, below is some information you should find helpful:

Federal Filing Deadlines

The following deadlines for 2023 are national deadlines which may not apply to certain areas of the country such as California.  Adjusted deadlines are discussed below in this section:

  • January 31, 2023: W-2’s are due to be provided by Employers.
  • March 15, 2022: Partnership and S corporation returns for calendar year 2022.
  • April 18, 2023: Deadline to file individual tax returns and returns for calendar year C- corporations.
  • April 18, 2023: First quarter 2023 estimated tax payment due.
  • April 18, 2023: Last day for individuals to make 2022 IRA and HAS contributions.
  • May 16, 2023: Not-for-profit returns due for calendar year 2021.
  • June 15, 2023:2nd quarter 2023 estimated tax payment due.
  • September 15, 2023: Third quarter 2023 estimated tax payment due.
  • September 15, 2023: Extended returns for partnerships and S- corporations due.
  • October 16, 2023: Extended individual tax returns due.
  • October 16, 2023: Extended calendar year C-corporation returns due.
  • January 15, 2024: Fourth quarter 2022 estimated tax payment due.

The IRS and the California Franchise Tax Board have adjusted the filing dates for certain counties in California due to the recent storms.  The IRS website identifies all of the counties, but the bulk of southern California is included.   On May 15, 2023, the following will be due:

  • 2022 individual income tax returns.
  • 2022 business returns which would normally be due on March 15, and April 18, 2023.
  • IRA and HSA contributions.
  • 2022 fourth quarter estimated payments due on January 17, 2023, and 2023 first quarter estimated payments due on April 18, 2023.
  • Qualifying farmers who normally file returns by March 1.
  • The 45- and 180-day deadlines for IRC section 1031 exchange transactions have been extended.

Adjusted Tax Brackets for 2022

For tax year 2022, inflation-adjusted federal tax brackets for individuals are as follows:

  • 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly);
  • 35%, for incomes over $231,250 ($462,500 for married couples filing jointly);
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly);
  • 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).

Tax Items of Interest

  • Itemized Deductions: There is no limitation on itemized deductions in 2023.
  • Alternative Minimum Tax: The Alternative Minimum Tax exemption amount for tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300).
  • Charitable deductions. For 2022, you can deduct up to 60% of your adjusted gross income (AGI) in qualified charitable donations if you plan to itemize your deductions.
  •  

Estate Planning

The annual gift tax exclusion amount has increased in 2023 from $16,000 to $17,000 per donor which means $34,000 for married couples. This adjustment will take effect for gifts of a present interest made on or after January 1, 2023.

The unified lifetime federal gift and estate tax exemption increases from $12,060,000 for 2022 to $12,920,000 for 2023. For the gross value of an estate above the exemption amount, a flat tax rate of 40% is imposed.

Absent congressional action, the exemption amount is scheduled to revert to approximately half of the current exemption amount on January 1, 2026.

Many of our clients created irrevocable grantor trusts in 2021 but did not fund their trusts. We are advising our clients to hold off on proceeding with any installment sales into irrevocable trusts or using the lifetime exemption for completed gifts if the desire is to eliminate estate tax for the following reasons:

  1. Interest rates are high and will likely go higher in the first three quarters of 2023.  The rates likely will start to go down at the end of 2023 and 2024.  It may be prudent to wait until the rates go down.
  2. Smart people are predicting a recession in the fourth quarter of 2024.  We have already experienced a decrease in value with some capital assets.  If values are going to decrease further, then waiting until we get into the recession will assist in freezing the values of assets at a lower value or maximize gifting opportunities.
  3. It is unlikely any laws will be passed in Washington in the next two years which will affect grantor trusts or the lifetime exemption.  There is no reason to rush to fund irrevocable trusts for estate tax purposes.

If you deem to fund irrevocable trusts for reasons other than estate tax optimization, we recommend the following:

  1. As stated above, interest rates will likely go up in the early part of 2023.  If you are going to do an installment sale, you should proceed as soon as possible to lock in on a lower rate.
  2. If lifetime exemption is to be used for completed gifting, cherry pick assets.  Be very strategic in which assets are to be funded into trust.
  3. Make a calculated decision on the installment sale interest rate. The short-term rate is not always the best choice.

California
“The Good, The Bad and The Ugly”

The Good

  1. The Cost of Hamburgers and Burritos: Last year I wrote an article about the projected cost of food served in restaurants soaring due to a new law affecting wages for restaurants called the Fast-Food Accountability and Standards Recovery Act (“FAST”) which was signed into law by Governor Newsome in September of last year.  On January 13, 2023, a Sacramento County Superior Court judge issued a preliminary injunction to stop FAST from taking effect, pending a vote by California voters.

    If allowed to take effect, FAST would have established a Fast-Food Council (“Council”), consisting of 10 unelected members, to determine minimum wages and workplace standards for fast food industry workers. The law was challenged by a coalition entitled Save Local Restaurants (Save), comprised of business owners, restaurateurs, franchisees, employees, consumers, and community-based organizations.

    Save is backing a statewide effort to overturn FAST through a referendum on the California ballot in November 2024. If and when the referendum qualifies for the ballot, the law will be put on hold until voters have a say in November 2024.

  2. Single Payer Healthcare: Last year I reported on a proposal known as CalCare which would possibly replace Medicare, Medicaid, and private health insurance with a state-run system.  The proposal died in 2022 without coming up for a vote.

    Assembly Member Ash Kalra was the bill sponsor. It was his decision to not bring the bill to a vote in the Assembly.  He withdrew the bill because he did not have enough votes for it to pass.

    Aside from debates over the government fully controlling health care, the bill was going to be funded by substantial new taxes on businesses and individuals which would have been devastating.  The taxes included a new 2.3% excise tax on business with more than $2 million in annual gross receipts, employers with 50 or more workers would incur a 1.25% payroll tax on total wages, and workers would pay additional progressive taxes based upon income levels maxing out at 18.05%.

  3. Net Operating Losses: California taxpayers may now deduct net operating losses (NOLs) on the 2022 tax return.  Suspension of NOLs started as a part of the state’s 2002-2003 budget.  The suspension was extended many times to cover projected budget deficits.  Ironically, in a year of a budget deficit, the suspension is lifted as a part of 2022 legislation.
    • Be mindful that you are not afforded an extended carryover period unless the NOL deduction would have produced a tax benefit were it not for the deduction suspension.
    • Utilize California NOLs “siloed” in legal entities on a combined group basis.
  4. Weather: A lot of irresponsible behavior regularly practiced in Sacramento has a “but we have nice weather” chaser.  During the middle of what appeared to be run-away inflation in 2022, California increased the fuel tax.  Citizen complaints were muted.  Indeed, California has nice weather.  On a quick online search, I found this ranking:
    1. California
    2. Hawaii
    3. Texas
    4. Arizona
    5. Florida
    6. Georgia
    7. South Carolina
    8. Delaware

    A lot of states may have no income tax and Arizona can brag all day long about a flat 2.5% flat tax, but my goodness, California has nice weather.

The Bad

  1. California Estate Planning and Taxation: Governor Gavin Newsom submitted his proposed budget on January 10, 2023.   The budget includes a proposal requiring net income derived from incomplete non-grantor trusts to be subject to California income tax if the grantor of the trust is a California resident.  It is projected to raise tax revenues of $30 million in 2023-24 and $17 million annually thereafter.
  2. Mansion Tax: California governments continue to pass unique taxes to raise revenue.  Los Angeles and Santa Monica are the most recent municipalities to pass into law a “Mansion Tax.”  They join San Francisco which has a rate of 6% on transfers of real property over $25 million, San Jose which now has a tax rate of 1.5% on transfers over $10 million, and Culver City which now has a tax rate of 4% on transfers over $10 million.
    In Los Angeles the voter-approved measure imposes a 4% tax on sales of property valued at more than $5 million, increasing to 5.5% on property worth more than $10 million. This tax is on any property sold and not just “mansions.”

    Santa Monica already had a transfer tax on the sale of property, but recently approved an additional tier.  Beginning March 1, 2023, tax at a rate of 5.71% will apply when the gross value is $8 million or greater.

    Jason Oppenheim of the Oppenheim Group estimates the 4 and 5.5 percent taxes under the LA measure amount to 20 to 30 percent of developer profits. “So those developers will choose to develop in other luxury communities where they won’t have to pay the tax, such as Beverly Hills, West Hollywood or Newport Beach.”

    Shane Phillips who is the Housing Initiative Project Manager for UCLA’s Lewis Center, is also quoted stating “developers building new, mixed-income multifamily construction should be exempt from the tax, or else they might be discouraged from building such housing. As it stands, developers who buy land for less than $5 million and then construct multifamily housing on it, likely pushing its value above $5 million, would owe the transfer tax whenever they sell the property.”

    The “mansion” taxes are one of the many new taxes hitting Californians in 2023.

The Ugly

A Wealth Tax Act was introduced on January 19, 2023, by Democrat Assembly member Alex Lee as Assembly Bill 259 and Assembly Constitutional Amendment 3.  If passed into law, this wealth tax will impose an annual 1.5% tax on worldwide net worth above $1 billion, starting as early as 2024. In 2026, the threshold for being subject to the wealth tax rate will fall to $50 million, with a 1% annual tax on wealth that rises to 1.5% for billionaires.

The proposal also includes provisions allowing the state to pursue wealth taxes from former California residents who may have built their wealth in California but later moved out of State.

To pass into law, the legislation will require two-thirds approval in both houses of the California State Legislature. The related constitutional amendment to raise the cap on taxing personal property will require a separate two-thirds approval from both houses. The proposal would then go before California voters.

Assembly Member Lee should chat with economists in France. France passed a wealth tax which led to an exodus of France’s richest. It is estimated the country experienced a net outflow of more than 60,000 millionaires between 2000 and 2016. France lost not only the revenue generated from the wealth tax, but all taxes including income tax and value added tax.

French economist Eric Pichet estimates the wealth tax cost France almost twice as much revenue as it generated. He concludes the wealth tax caused an annual fiscal shortfall of €7bn and reduced gross domestic product growth by 0.2 per cent a year.

California was not the only state proposing a wealth tax last week.  California was joined by Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York, and Washington.

California already has a problem with wealthy people leaving the state.  Increasing taxes on the wealthy is not the answer. Studies show the top 1% of taxpayers pay about 50% of state income taxes in California, New York and elsewhere.  An exodus of wealthy residents will be extremely detrimental to California.

With the plethora of tax updates and changes coming both on the state and federal levels, it is important to review your 2023 tax and estate planning that may be affected.  We will continue to keep you informed on any news we hear throughout the year.