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Inflation eases tax bites in 2024 on capital gains, estates, and other wealth-related income

Plus, a look at how a higher cost of living affects gifts before you go, youngsters' investment earnings, and more.

Scarfed woman in luxury car in front of estate_lance-reis-5ycQD13aSWQ-unsplash1
Photo by Lance Reis on Unsplash

What we would do with our wealth may differ, but most of us want to be rich.

And even if the Internal Revenue Service is successful in its recently announced effort to crack down on higher income tax evaders, having money is always preferable.

In fact, if you've got beaucoup cash, you don't really have to try to slip one past Uncle Sam. Many of the current wealth-related provisions in the Internal Revenue Code help the richest among us stay that way.

Some of those tax laws can even help those of us who are of more modest means increase what we've got. And, as reviewed in this Part 6 of the ol' blog's annual tax inflation series, many of these high-dollar tax laws are adjusted each year for inflation.

Next year, long-term investors will see more of their capital gains fall into lower tax rate brackets. Those who've parlayed their market acumen into multimillions will be able to pass along even more of that large estate tax-free to heirs. We can give more while still around. And youngsters getting an early start in unearned income efforts can shield more of their dollars.

Since time is money, let's get started on what the 2024 wealth-related inflation adjustments mean.

Lesser tax bite for capital gains: It's no secret that richer people tend to take the approach that that it's better to make your money work for you than to work for your money. Essentially, they get much if not most of their income from investing.

Part of the appeal here is that when investments are long-term, the profit they produce is taxed at a lower rate. The tax rates on the proceeds from assets held for more than a year are 0 percent, 15 percent, and 20 percent. Which one applies depends on your overall income and filing status.

Thanks to changes made by 2017's Tax Cuts and Jobs Act (TCJA), there are separate income brackets for the three capital gains tax rates. The earnings to which the three long-term capital gains tax rates will apply in 2024 are shown in the table below:

2024
Tax Year

Capital Gains Taxable Income Brackets by Filing Status

Long-Term Capital Gains Tax Rate

Single

Head of Household

Married
Filing Jointly
or Surviving
Spouse

Married Filing
Separately

0%

$0 to $47,025

$0 to $63,000

$0 to $94,050

$0 to $47,025

15%

$47,026 to $518,900

$63,001 to $551,350

$94,051 to $583,750

$47,026 to $291,850

20%

$518,901
and more

$551,351
and more

$583,751
and more

$291,851
and more

For comparison, and to use where you're figuring your 2023 taxes next year, here are this year's long-term capital gains rates and income brackets:

2023
Tax Year

Capital Gains Taxable Income Brackets by Filing Status

Long-Term Capital Gains Tax Rate

Single

Head of Household

Married
Filing Jointly
or Surviving
Spouse

Married Filing
Separately

0%

$0 to $44,625

$0 to $59,750

$0 to $89,250

$0 to $44,625

15%

$44,626 to $492,300

$59,751 to $523,050

$89,251 to $553,850

$44,626 to $276,000

20%

$492,301
and more

$523,051
and more

$553,851
and more

$276,001
and more


In addition to capital gains tax rates listed in the tables, higher-income taxpayers may also have to pay an additional 3.8% net investment income tax.

And yes, there are other capital gains tax rates for other holdings, like collectibles, but they are not affected by inflation.

Uncle Sam also collects capital gains taxes on estates and trusts.

For 2024, the maximum zero capital gains tax rate applies to estates or trusts worth up to $3,150. The top earnings level for an estate or trust to be taxed at 15 percent is $15,450. The 20 percent rate applies to these entities worth $15,451 or more.

For comparison, in 2023 the maximum zero capital gains tax rate applies to estates or trusts worth up to $3,000. The top earnings level for an estate or trust to be taxed at 15 percent is $14,650. The 20 percent rate applies to these entities worth $14,641 or more.

Estate tax exemption increase: Thanks to your investments over the years, you've been able to fulfill the goal of providing for your family here and now. You've also accumulated enough to be able to leave a generous amount to your heirs.

The good news for most of us is that we won't have to worry about the federal estate tax. A portion of what you leave is free from taxation by Uncle Sam, and that generally covers most U.S taxpayers.

Five years ago, the TCJA expanded the estate tax exemption amount even more. The exemption also is adjusted for inflation.

For 2024, the inflation adjustment means an individual can leave heirs a tax-free estate of up to $13.61 million. That's per person, so a married couple can protect $27.22 million from estate taxation.

That's a nice increase from 2023's nontaxable estate assets level of $12.92 million per person, and $25.84 million for married couples.

When an estate exceeds those tax-year amounts, then and only then is the federal estate tax, which can go as high as 40 percent, assessed on the overage.

Obviously, these ever-increasing (at least until the TCJA expires at the end of 2025 or is changed before then) multimillion-dollar exclusion amounts mean that the hubby and I — and our families and our friends — likely will never have to worry about the federal estate tax … unless we win the lottery!

Note, though, that you might have to worry about the state tax collector. A dozen states and the District of Columbia still have either an estate or inheritance tax — our old Maryland stomping grounds has both — and their exclusion levels are much, much lower than the federal level.

Estate and trust tax rates: There's also a tax, with its own rate schedule, on earnings from trusts and estates. This applies to income that trustees choose to retain rather than distribute to beneficiaries.

Under this system, higher rates kick in at lower income levels than the tax rates and income brackets for individual taxpayers. The design was intentional to keep trusts from being used as tax shelters.

However, the TCJA lowered tax rates for trusts and estates, just like it did for individuals, at least through 2025. It also reduced the number of trust and estate tax brackets from five to four.

The estate and trust tax rates for 2023 and 2024 are shown in the table below.

Trusts and Estates Tax Rates and Income Brackets

Rates

2023

2024

10%

$0 to $2,900

$0 to $3,100

24%

$2,901 to $10,550

$3,101 to $11,150

35%

$10,551 to $14,450

$11,151 to $15,200

37%

$14,451 and more

$15,201 and more


Tax-free gifting, too:
 Sometimes people want to share their wealth while they are still around to get the thanks for their generosity.

Not only is that a heartwarming move, it could be tax smart. Giving away some of your assets could help keep your eventual estate out of Uncle Sam's hands when death and taxes finally converge.

The tax code allows you to give a specific amount, known as an annual exclusion, in gifts to others. This will help reduce your estate's value and there's no tax ramifications for the gift recipients.

For 2024, that exclusion amount is $18,000 per person. That's a grand more than the $17,000 you can give away for the 2023 tax year. Remember, Christmas isn't that far away!

Like the estate tax exemption, the gift exclusion limits each year are per person. That means if you're married, you and your spouse each can give a combined $36,000 to the same person in 2024, up from the $34,000 amount for married couples in 2023.

Pulling out my handy calculator, that also means that a married couple with three kids and five grandchildren can each give those eight family members a combined gift total of $288,000 in 2024. That's up from the $272,000 in 2023 without facing gift tax consequences.

And despite my example, you (and your spouse) also can give these gifts to folks beyond your family. That's right. There's no familial relationship requirement. So if you have some spare cash and really enjoy the ol' blog, just let me know.

Also, the gifts are not limited to dollars. You can give assets valued up to the limit, such as gifts of real property and family heirlooms.

By bestowing your cash and property beforehand, you can reduce the amount of your assets left to be distributed after you're gone. This is a good way to dole out your estate the way you want and keep its value under the amount that will trigger the federal estate tax.

Even better, as long as you follow the rules, you won't face any gift tax.

Best of all, for those on your list, your gifts are not taxable to the recipients.

Adding up all those gifts: The major tax-related gifting rule is, of course, that you can't just give away all your riches to escape the tax collector. That's why the lifetime gift exemption, aka the unified credit against the estate tax, was created.

As the name indicates, the lifetime gift exemption is the total amount of gifts that can be given away tax-free by a person over his or her lifetime to any number of people.

It's easy to keep track of because it's the same as the annual estate tax exemption amount. Again, thanks to inflation that's $13.61 million (or $27.22 million per married couple) in 2024. For 2023, it's $12.92 million (or $25.84 per married couple).

If you do go over the lifetime gift exclusion, you will owe a 40 percent tax on those excessive gifts.

Counting the kiddie tax: One of the best gifts parents can give their children is financial education. In many cases, this includes investment accounts in the youngsters' names so they can see first-hand how the system works, or sometimes doesn't.

Often the accounts are opened with monetary gifts, which as noted earlier can be useful tax planning for the givers.

Investments and their earnings have some additional tax considerations for young market mavens. When young people — up to age 23 if a full-time student or 18 if not going to college — have unearned income, generally from dividends and interest or distributed capital gains, that exceed certain limits, the kiddie tax comes into play.

The kiddie tax first appeared in 1986 as a legislative way to close a tax loophole for the wealthy. After a certain earnings level, a child's investment income was taxed at the same rate as that of their parents. By effectively raising the potential tax on the youngsters' passive income, the idea was that well-to-do adults wouldn't be so inclined to shift their wealth by putting it in their lower-taxed children's names.

So what's the earnings amount today that triggers the kiddie tax?

For 2024, a young investor's first $1,300 of unearned income is not taxable. That's a slight increase from the first $1,250 of unearned income that's not taxable in 2023.

Then the next $1,300 in unearned income in 2024 ($1,250 in 2023) is taxed at the child's tax rate, typically the lowest 10 percent rate.

Only when a child's investment earnings top the combined limit — $2,600 in 2024 (the untaxed $1,300 and the next $1,300 taxed at the child's rate) and $2,500 in 2023 — is the young financier's excess unearned income is taxed at higher rates that typically apply to their parents' taxes.

Parents can opt to include a child's gross income in the adults' gross income and calculate the kiddie tax there. One of the requirements for this parental election is that a child's gross income for 2024 must be more than $1,300 but less than $13,000. As for 2023 taxes, the range is more than $1,250 but less than $12,500.

More inflation tax info on the way: If you are rich enough to worry about the latest estate and other wealth-related taxes and their inflation adjusted amounts, you also know that inter-generational income and how to make, preserve, distribute, and pay taxes on it can get complicated. You should hire a financial and tax adviser if you haven't already.

If your wealth is still in the aspirational stage, that's fine, too. It's always good to be prepared. You can find more on inflation adjustments that affect all taxpayers, regardless of our relative wealth, in the ol' blog's continuing 2024 inflation series. The box below has a link to help you do that.

Thanks for your tax inflation interest and reading this post, the earlier ones, and (I hope) those still to be published. 

This post on inflation's effects on 2024 tax year provisions that affect the wealthy
is Part 6 of the ol' blog's annual series on myriad tax-related inflation adjustments. 
The 10-part series started with a look at next year's
income tax brackets and rates.
At the end of that first item there is a directory
of all of the 2024 tax-related inflation changes.
Note: The 2024 figures in this post apply to that tax year's return to be filed in 2025.
For comparison purposes, you'll also find 2023 amounts that apply
to this year's 2023 tax returns that will be due April 15, 2024.

 

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