In order to take advantage of planning opportunities, individuals who are not prepared for this potentially seismic shift should speak with their advisors as soon as possible.

High-net-worth (HNW) individuals and their advisors should be aware of the most recent federal tax changes for 2023, especially as pandemic-related tax breaks begin to expire, as the individual tax filing deadline approaches.

Staying informed about policy and tax changes, such as Secure Act 2.0, estate tax changes, and charitable deduction shifts, enables HNW individuals to take proactive measures and align their financial plans with long-term goals.

Secure Act 2.0

The Secure Act 2.0, endorsed into regulation by President Biden in December 2022, means to extend and further develop retirement reserve funds choices for Americans. For HNW individuals, the new law has made significant changes.

The provision that raises the age limit for required minimum distributions from 72-75 in 2023 is the most significant. Using options like a Roth IRA, this change allows people to keep more of their savings invested for a longer time and extends the time it takes to convert tax-deferred assets to tax-free assets.

It is also essential to keep in mind that the Secure Act 2.0 proposes raising the cap on catch-up contributions for people between the ages of 60 and 63. Who are enrolled in employer-sponsored plans like 401(k), 403(b), and 457(b) by 2025. The maximum will be $10,000 or 150 percent of the standard catch-up amounts, whichever is greater. For those who are eligible, this strategy has the potential to increase retirement savings while also lowering gross income.

However, there is a restriction that applies to people with high incomes. For those earning at least $145,000, all catch-up contributions must be made to a Roth IRA account by 2024. Advisors must discuss options with HNW clients, such as increasing assets in Roth accounts, to prepare for this change.

Additionally, Secure 2.0 introduces brand-new options for tax diversification. Previously, 401(k), 403(b), and 457(b) plans required all employer contributions to be made before taxes, and tax on contribution and earnings occurred only upon distribution. The law now allows plan participants to designate Roth contributions for some or all of their employer-matching contributions and/or non-elective contributions. Advisors should inform clients who seek a balance between pre-tax, Roth, and non-retirement accumulations about this.

Wealthy individuals should consider penalty-free rollovers from 529 plans to Roth IRA’s, a change introduced by Secure 2.0 Act. Any rollover counts toward your annual Roth IRA contribution limit of $6,500 (or $7,500 if you are over 50). A 529 plan’s lifetime rollover limit to an IRA is $35,000

Changes to the Gift and Estate Tax

The federal gift tax exemption for individuals will rise to $17,000 in 2023, up from $1,000. The current exemption for married couples is $34,000. Additionally, the individual lifetime gift and estate tax exemption has increased to $25.84 million for couples, up from $24.12 million. While the exemption for individuals has increased to $12.92 million from $12.06 million.

The good news is that next year, individuals who have already reached their lifetime gifting exemption limit can give an additional $860,000 to individuals and $1.72 million to couples without paying gift taxes. However, the bad news is that the gift and estate tax exemption is about to undergo a significant change in 2023, which is one year closer. Toward the end of 2025, the figure is expecting to cut by 50 percent unless the tax code is change. Act fast and seek advice to benefit from planning opportunities amidst this major shift.

Deductions for Charitable Donations 

Many high-net-worth individuals can claim tax deductions by donating to charity, which is a reliable method to reduce taxes.

Advisors should investigate the potential advantages of assisting their clients in lowering their taxable income by taking charitable deductions in an environment where interest rates are rising and deductions are changing. The use of charitable remainder trusts (CRTs) is one example. CRT allows a taxpayer to draw annual income for a predetermined period, while also allowing them to donate to charity. Timely advice is crucial if a citizen has made significant charitable donations and expects a certain type of income.

Previously unseen tax complexity and tax refund volatility will confront HNW individuals. As a result of various tax law changes that will take effect in the coming years. The tax situation of their clients will require advisors to pay even more close attention. Planning a mid-year examination to keep away from shock adjusts at charge time is profoundly prudent. Tailored analysis using these methods can help advisors guide high-net-worth clients towards tax planning opportunities.

The tax laws are very complex. Our short blog articles can only partially cover all the rules and nuances. Your specific facts may hold various opportunities and possible risks that only trained, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out alone. Consider trying the IfindTaxPro marketplace by posting your project and signing up here. 

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