The legal organization, Democracy Forward has described Project 2025 as "among the most profound threats to the American people."  On its website, the Heritage Foundation says of its plan, "It's past time to lay the groundwork for a White House more friendly to the right."

The significant changes presented in the four pillars of Project 2025, designed for a future Republican administration, would fundamentally alter the federal government. That includes everything from public education and the Federal Reserve to the IRS and the United States tax system.

Taxes and tax policy were already set to be a major issue following the 2024 presidential election. Several key provisions of the Tax Cuts and Jobs Act (TCJA, also commonly referred to as the “Trump tax cuts”) are scheduled to expire next year. However, with the election on the horizon, it is important to be informed about various proposals that could impact your finances — including those in Project 2025.

What does Project 2025 say about taxes? 

Regarding taxes, Project 2025 provides for several significant changes, some of which are summarized below.

Income tax rates

Changing to two income tax rates: 15% and 30%

Currently, there are seven different income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These marginal rates are tied to inflation-adjusted federal income tax brackets. 

Chapter 25 of the project's “Mandate for Leadership,” states, “The Treasury should work with Congress to simplify the tax code by enacting a simple two-rate individual tax system of 15 percent and 30 percent that eliminates most deductions, credits and exclusions.”

The Project 2025 playbook suggests that the 30% tax rate should begin “at or near the Social Security wage base,” currently $168,600.

• Critics contend that such a drastic tax rate simplification might not account for varied individual financial situations. 
• There are also concerns that two tax rates and eliminating deductions and credits would be less fair, increasing the tax burden on middle-income earners. 

Some question whether a two-rate system would lead to a loss of federal revenue.

Capital gains tax

Imposing a 15% tax on capital gains and dividends

Advocates suggest this would incentivize investment and entrepreneurship. However, those opposed argue a 15% capital gains tax rate is too low. This is tied to existing concerns that lower capital gains rates disproportionately benefit the wealthy and that cutting capital gains tax rates can lead to a loss of government revenue. 

Additionally, some argue that maintaining a separate capital gains tax rate alongside ordinary income rates works against simplifying the tax code.

'Trump tax cuts'

Extending and expanding the 2017 Tax Cuts and Jobs Act

Supporters argue that this would stimulate economic growth. However, critics point to studies suggesting that these cuts have contributed to the national debt. (The Congressional Budget Office estimates that extending the 2017 tax cuts alone would increase the deficit by $4.6 trillion by 2028.)

Another concern is data indicating that nearly half of the tax benefits in the TCJA have benefited the top 5% of U.S. taxpayers. Aside from potentially adding to wealth inequality, it would be difficult to maintain the 2017 tax cuts without significant reductions in federal spending.

Corporate tax rate

Lowering the corporate tax rate from 21% to 18%

Supporters have argued that this reduction might stimulate economic growth by encouraging business investment and job creation. They also contend that a lower corporate tax rate would make the U.S. more competitive, potentially attracting foreign investment. 

Meanwhile, opponents worry that reducing the corporate tax rate could significantly reduce government revenue. There’s also the longstanding debate over studies showing limited economic benefits associated with corporate tax cuts. Additionally, some say that lowering corporate taxes shifts the tax burden to individuals and encourages tax avoidance.

Project 2025 plans

In different “reform stages,” Project 2025 proposals include eliminating individual and corporate income taxes in favor of a consumption tax. Proponents argue this would simplify the tax system and encourage saving and investment. However, critics warn that such a shift could burden people with lower and middle incomes who spend more on essential goods and services.

Project 2025 also proposes significant changes to the IRS, including budget cuts and increased presidential appointments within the agency. 

Additionally, the project advocates a three-fifths vote threshold for future tax increases. In an “intermediate tax reform” stage, the project would repeal the clean energy tax breaks and “all tax increases passed as part of the Inflation Reduction Act.”

While supporters argue changing the IRS would reduce government overreach, opponents worry it could hamper the agency's ability to enforce tax laws and collect revenue effectively. (The IRS has recently increased its compliance efforts relative to high earners and large corporations.)

Beyond taxes, Project 2025 proposes other sweeping changes, including but not limited to:

• Eliminating various federal agencies, including the U.S. Department of Education
• Restricting abortion access
• Increasing presidential authority
• Cutting federal funding for renewable energy research
• Implementing stricter immigration policies

Project 2025 taxes: Bottom line

Project 2025 is seen as a conservative (some say "radical") roadmap for overhauling federal government structure and policy if a Republican administration regains the White House in 2024. 

Supporters argue that proposed tax "reforms" would simplify the tax code and boost economic growth and competitiveness. (*Revenue estimates don't appear in the Project 2025 playbook.) However, opponents warn of negative consequences like increased income inequality, ballooning national debt, reduced government capacity to provide essential services and unchecked authority.

In any case, and especially in the current highly charged political environment, it’s important to remain informed about potential tax changes that could affect your finances.

Related

• President Biden's Capital Gains Tax Rate Proposal
• Types of Income the IRS Doesn’t Tax
• Supreme Court Overturns Chevron: What it Means for the IRS
• The Taxes That Come out of Your Paycheck

That’s because several withholdings, including federal income tax, state income tax, Social Security tax, and Medicare tax, come from paychecks. It’s no wonder payroll deductions are confusing for many employees. 

So, let's dive into key taxes that seem to eat away at your earnings. 

Payroll tax: Withholdings you can’t ignore

Federal law requires employers to withhold employment taxes from employee pay. Employment taxes include federal income tax withholding and taxes for Social Security and Medicare. 

But when it comes to all the taxes deducted from your pay, four main types affect most U.S. workers. Here’s a brief summary of each.

1. Federal tax withholding

First is federal income tax withholding, which the government uses to fund everything from national defense to public education. Ultimately, the total federal tax you pay each year depends on several factors, including your taxable income, filing status, and tax bracket.

• The W-4 form you fill out when you start your job helps your employer determine how much to withhold for federal taxes.
• It’s important to update your W-4 and adjust your withholding if needed when you experience significant life changes that could affect your tax situation, like getting married, having a child, or a second job. Other examples might include starting a business or receiving a large bonus or pay increase.
• Filling out the W-4 form incorrectly or failing to update it after major life changes can result in inaccurate withholding.

For example, some people withhold too much from their paychecks, resulting in large tax refunds. However, a big tax refund often means giving the government an interest-free loan.

Meanwhile, other people don’t withhold enough, which can lead to owing tax when tax season rolls around and, in some cases, potentially facing IRS underpayment penalties. That is why the IRS and others often recommend evaluating and adjusting your withholdings throughout the year. A tool on the IRS website can help you estimate your federal tax withholding.

2. State tax withholding

Next, there is state income tax. The amount of state income tax deducted from your pay varies depending on where you live and work. 

• Some states, like Florida and Texas, don't have state income tax. Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Washington, and Wyoming also don’t have personal income tax. Other states, like California and New York, for example, are known for higher state income tax rates. 
• Several states are cutting income taxes for 2024. For example, as Kiplinger reported, Georgia has a new personal income tax rate designed to offer tax relief for its residents.
• Other states may have other mandatory payroll taxes. Washington state has a first-of-its-kind payroll tax to help residents cover long-term care expenses.

It’s important to remember that state income taxes provide revenue for state governments to fund essential public services and programs. These taxes allow states to invest in education, infrastructure, and other critical areas.

3. Social Security tax: Who pays FICA taxes?

Social Security is a confusing tax for some. It is part of what's known as FICA (Federal Insurance Contributions Act) taxes. Social Security taxes are collected to provide retirement, disability, and health benefits for eligible older adults. Both employees and employers pay Social Security taxes, each contributing an equal share. 

• Employees pay 6.2% of their wages into this system up to a specific limit. The 2024 Social Security tax limit is $168,600. 
• Self-employed individuals pay both the employee and employer portions of Social Security tax. However, half of the tax is deductible on federal returns if you're self-employed.

Some people think of the Social Security tax as mandatory retirement savings. (The system operates on a pay-as-you-go basis, with current workers' contributions supporting current beneficiaries while building credit toward their future benefits.) However, it should be noted that whether Social Security will remain solvent for future generations is a topic of ongoing debate. Some economists have suggested eliminating 401(k)s to help shore up Social Security.

Note: It’s also important for retirees and older adults to know that once they receive benefits, up to 85% could be subject to tax. For more information, see Taxes on Social Security: Five Things to Know.

4. Medicare tax

Then, there is the Medicare tax. The Medicare payroll tax funds the Medicare program, which provides health insurance for older adults over 65 and certain people with disabilities. 

• Medicare taxes are part of FICA and are automatically deducted from employees' paychecks. 
• Both employers and employees contribute to this tax, which is 2.9% of earned income and wages (1.45% paid by each). 
• Unlike the Social Security tax, however, there is no income limit for Medicare tax, meaning all earned income and wages are subject to this tax. As mentioned, self-employed individuals pay 15.3% in self-employment taxes (12.4% Social Security, 2.9% Medicare) on net earnings. 

Note: High-income earners may face two Medicare surtaxes. One is the 0.9% Additional Medicare Tax on earned income above $200,000 ($250,000 for married couples filing jointly). The other is a 3.8% Net Investment Income Tax (NIIT) on certain net investment income of individuals, estates and trusts above statutory threshold amounts. Both surtaxes are paid by the individual, with no employer contribution.

Voluntary deductions

While those four taxes are the main types taken from your paycheck, they are not the only payroll deductions affecting your take-home pay. 

Many of us also have voluntary deductions from our pay for things like health insurance premiums, retirement contributions (like 401(k) plans), and sometimes even union dues. While these aren't taxes, they still impact how much money you earn at work ends up in your bank account.

Taxes out of paycheck: Bottom line

Payroll tax deductions can be frustrating, but understanding how they work is essential in managing your finances. Additionally, it may help to consider your voluntary paycheck deductions as investments in your health and future financial security.

Still, it’s good to monitor your federal tax withholdings and always check your paycheck details to ensure your gross pay, paid time off and sick leave balances, and other key information are correct.

Related

• Types of Income the IRS Doesn't Tax
• Federal Tax Brackets and Income Tax Rates 
• Social Security Tax Limit Rises for 2024
• A Bunch of Tax Deductions and Credits You Should Know

I see all sorts of articles online regarding the benefits of doing $100,000 Roth conversions over a 10-year period, which makes me think that a lot of people aren’t even evaluating income tax brackets. But that’s the best place to start when evaluating whether a Roth conversion makes sense.

Here are three thresholds you need to consider before deciding to do a Roth conversion:

1. Your income tax rate.

This is us looking left. The reality of a Roth conversion is that it’s just a bet that your current tax rate is lower than your future tax rate. If so, you’d rather pay the taxes today. If you’re in the period between retirement and when you start RMDs (required minimum distributions), this can be a pretty safe bet.

I met with a client the other day who is three years out from RMDs. Once both spouses start receiving RMDs, that will push them from the 24% marginal bracket to 32%. So, in doing the conversion calculation, we want to see how much we can convert while staying in the 24% bracket.

2. Your capital gains tax rate.

We are looking right. People talk about capital gains tax rates as though they are 15% for everyone. That is not the case. Evaluating capital gains rates is most important at low income levels and at high income levels.

When your income is very low, a Roth conversion can cause you to go from paying 0% in capital gains to paying 15% on everything. This is an expensive trigger.

Once taxable income crosses above $518,900 (S) or $583,750 (MFJ) for 2024, you jump from 15% to 20%. Less talked about is the 3.8% net investment income tax, which, as it sounds, is a tax on investment income over $200,000 for individuals and $250,000 for a married couple filing jointly.

3. Your Medicare premiums.

Finally, we are going to check the bike lane to ensure we don’t get smacked by an e-bike. Premiums for Medicare Parts B and D are income-adjusted. However, unlike the above income tests, Medicare premiums are determined by gross, not taxable, income. The Part B premiums can increase by as much as $419 per month, per person, based on income. In my experience, this is the one that upsets people the most.

To be clear, you’re not always trying to stay under every threshold. In many situations, it makes sense to pay more in Medicare premiums to avoid a much larger income tax bill down the road.

Evaluating Roth conversions in your situation requires projecting out your future tax rates; i.e., should you even be crossing the road at all? To get a sense of what your rates may look like, you can build out a free plan here.

Related Content

• Roth Conversions: Convert Everything at Once or as You Go?
• Are You Ready to ‘Rothify’ Your Retirement?
• Is a Roth Conversion for You? Seven Factors to Consider
• Roth IRA Conversions: Benefits and Considerations Beyond Taxes
• How a Backdoor Roth IRA Works (and Its Drawbacks)

But people also recognize this: No one wants to give Uncle Sam more money than necessary, especially since all of us have our own uses for that money.

That’s where good tax planning comes into play. With the right strategies, you can reduce your income tax bill, put fewer dollars in Uncle Sam’s pocket and keep more in yours.

That can be especially beneficial for retirees, who need to make sure their money lasts the rest of their lives.

Let’s look at three ways you can give Uncle Sam less so you can keep more.

1. Carefully consider which assets to leave to beneficiaries.

It’s nice to be able to bequeath something to your children, grandchildren or others after you are gone. But as you make plans to do so, keep in mind the income tax ramifications, both for you and for your heirs. With the right moves, you both can avoid taxes.

For example, if you have assets such as stocks or real estate that have appreciated in value since you purchased them, you should consider the advantages of a “step-up in basis.” If you were to sell those assets now, you would pay capital gains taxes. on whatever gains you have made. Leave these assets to your heirs, though, and the situation changes because the step-up in basis rule comes into play. Under that rule, there is a restart on the date from which the gains are measured. Instead of being calculated from when you purchased the asset, the gain is determined from the time your heirs inherited the asset.

Let’s say that many years ago, you bought several shares of a stock for $10,000, and today those shares are worth $50,000. If you have the option, this might be a good candidate to leave to your heirs rather than sell right now. If you sold the stock, you would owe capital gains tax on the $40,000 gain. But if you leave the stock to your beneficiaries, their starting point for capital gains is $50,000 (or whatever the value is at the time of your death) because of the step-up in basis. If they sell quickly, they likely would owe little or no capital gains taxes.

2. Have a strategy to pay taxes efficiently.

But, of course, leaving assets to beneficiaries means someone else has to pay taxes after you are gone.

You are paying taxes in the here and now. As you do so, you need a strategy to make sure you are paying them in the most efficient manner and that you are taking advantage of anything in the tax code that allows you to pay less.

That begins with capitalizing on the income-tax deductions available to you. About 90% of taxpayers use the standard deduction, which has risen over the years, especially after the Tax Cuts and Jobs Act of 2017 was passed. The deduction is even higher for those who are blind or who are 65 and older, though you have to be sure to check a box on your 1040 form and add on the extra amount.

In the past, more people Itemized their deductions, and that is still an option. It’s just difficult for the average person to come up with enough deductions to bring the itemized total higher than the standard deduction. But if you can itemize and claim an even greater deduction than the standard, you want to go that route.

Among the tax deductions that could help you get to the appropriate total are mortgage interest, medical expenses and charitable contributions. Make sure you deduct only what is allowed, though. For example, medical expenses are deductible only when they exceed 7.5% of your adjusted gross income.

Another way to be efficient with your tax payments is to keep an eye on the income tax brackets and the possibility of dropping into a lower bracket. For example, if a married couple filing jointly can reduce their taxable income to $89,450 or lower, they move out of the 22% tax bracket and into the 12% bracket. (Extra deductions can help you move from one of the higher tax brackets as well, but the gap between the 22% bracket and the 12% is the largest.) It’s worth noting that even when you are in the higher bracket, all of your income is not taxed at the higher rate. Only the portion of your income that exceeds a certain threshold is taxed at that higher rate.

3. Make sure investments are in the proper accounts.

One other way to pay taxes efficiently is to make sure your investments are in the appropriate accounts that will be most likely to produce the desired results. If you aren’t careful, you can incur unnecessary taxes.

Essentially, the accounts you might have money invested in can be broken down into two types: accounts that are taxable and accounts that come with some sort of tax advantage.

Taxable accounts include brokerage accounts, where you might hold stocks. The upside with these is there is no age restriction or other restriction on getting access to your money. You do pay taxes, but if you have held the asset for more than a year, it is considered a long-term capital gain and is taxed at a lower rate than regular income.

Tax-advantaged accounts are those with investments that are tax-deferred, such as a traditional IRA or 401(k), or that are tax-exempt, such as a Roth IRA, where you pay the taxes now but not when you begin withdrawing money. Although these accounts give you some tax advantages, one tradeoff is they have rules on when you can withdraw money and penalties if you break those rules.

So where to put your money?

That comes down to the type of investment. As much as possible, you want investments that are subject to little or no taxes in your taxable accounts. Investments subject to a higher tax rate should go into the tax-advantaged account.

A good financial professional can help you determine the best investment accounts for your individual situation. That person can also help you find other ways to make sure you are paying taxes in the most efficient manner possible.

By taking the right measures, you will still pay what you legally owe — but not more than required.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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When you are giving to charity, that must be the primary intent. The tax savings that go along with it should be optimized by choosing the strategy that makes the most sense for you. This article is for those who are charitably inclined and also have a desire for retirement income. Lastly, if executed properly, these methods will save some tax bucks. 

Charitable gift annuity

If you’re a Baby Boomer, it’s likely your alma mater has made you quite aware of its charitable gift annuity (CGA). Many college websites will even run an illustration to show you the tax benefits and income you’ll receive on an annual basis.

Here’s how it works:

• You make an irrevocable gift of cash or an appreciated asset to a charity. Universities are common beneficiaries, but it can be any qualified charity that has a charitable gift annuity
• You receive an immediate charitable deduction for a portion of the gift
• You receive a fixed income stream for a set period or for the rest of your life
• At the end of the period or your life, the remainder goes to or stays with the charity

Here’s where I would use this strategy:

• An appreciated asset is always a good starting point. If you bought Apple stock before you bought an iPhone or bought Nvidia stock before 2023, you may be a good candidate
• While these figures are subjective, I generally think this strategy makes sense for a single charity where the gift is between $50,000 and $250,000. If you get above $250,000, a charitable remainder trust may make more sense
• You feel strongly about the charity. Remember, this is an irrevocable gift. You cannot get the money back, and you cannot change the remainder beneficiary

Charitable remainder trust

This is a strategy we employ for clients who are generous but want to reserve the right to change who they are generous toward. As with your living trust, you will have to employ a trust and estate attorney to draft the trust. You will also have to use the services of a tax professional to file a trust tax return each year. Sound complicated? 

Here's how it works:

• You make an irrevocable gift into a charitable remainder trust (CRT)
• You receive an immediate charitable deduction for a portion of the gift
• You receive a fixed income stream (through a CRAT) or a percentage of the balance in the trust (through a CRUT) for a set term or for the rest of your life
• At your death, the remainder goes to the beneficiaries listed in the trust

Because the mechanics sound, and are, very similar, it’s important to highlight some of the reasons I would opt for the CRT route over the CGA route:

• Desire for flexibility. The gift to the trust is irrevocable, but you can change the beneficiaries of the trust
• The complexity necessitates larger gifts to make sense. You must consider the cost to draw up the trust, file an annual tax return and manage the trust assets
• There can be multiple beneficiaries
• It gives the trustee control of the investments
• A CRT allows you to avoid a potentially large capital gain

In every situation that we have recommended one of these strategies, there have been two stories. First, the story of the charity and the impact that charity had on the client or is having on the world. Second, the story of the appreciated investment that allowed the donor to make such a large gift.

This article should not serve as a recommendation to do one or both. It should simply allow you to zoom in a little closer on what may make sense for you. But before you do, make sure you have the capacity to give. In other words, can you give a large gift and still maintain your lifestyle? Your financial plan answers that question. You can build one using the free version of our planning software here. 

Related content

• Three Ways to Give to Your Kids Tax-Free While You’re Still Alive
• Four Ways to Give Money Tax-Free to Your Kids When You Die
• Developing a Charitable Giving Strategy: Where to Begin
• How to Assess the Impact of Your Charitable Giving
• What to Do if Your Passion for Charitable Giving Has Flagged

July gas tax increase: California, six more states

These increases, which took effect today, July 1, will likely impact your wallet as you fill up for road trips and summer activities.

But it's not all bad news. Gas tax rates were reduced a bit in a couple of places, offering some relief. Is your state one of them?

California gas tax increase 2024

California continues to lead the nation with the highest gas tax in 2024, which climbs to 69.8 cents per gallon as of July 1. This increase pushes the Golden State's average price for a gallon of regular gasoline to about $4.79. 

In other tax news, California also has a new gun and ammo tax effective July 1. Additionally, the state's Supreme Court just removed an initiative from the California November ballot that proposed to have taxpayers weigh in on state tax hikes.

Gas tax increase Illinois

Not far behind, Illinois is raising its gas tax to 47 cents per gallon, a 3.5% increase from its previous rate of 45.4 cents per gallon. For 2024, the Land of Lincoln again ranks among the country's most expensive states for gas taxes.

Illinois also has one of the highest sales tax rates in the U.S., but it's one of the states that doesn't tax retirement income.

Indiana gas tax increase

Indiana motorists will also see a bump in their gas tax as of July 1. Gas tax in the Hoosier State reaches 56.1 cents per gallon when additional fees are factored in. The per gallon gas tax rate rose from 34 cents to 35 cents.

Virginia gas tax rate

Virginia is implementing a modest gas tax increase to 30.8 cents per gallon from 29.8 cents as of July 1. While not as steep as some other states, this hike still contributes to the overall cost of driving a vehicle in the Commonwealth.

Missouri gas tax increase

Missouri is making a more substantial jump, with its motor fuel tax rising to 27.5 cents per gallon from 24.5 cents per gallon. This increase may come as a surprise to Show-Me State residents accustomed to lower gas taxes. The average price of a gallon of regular in Missouri is about $3.13.

Also, as Kiplinger reported, Missouri recently became more tax-friendly toward retirees. The state repealed its income tax on Social Security retirement benefits, effective for the 2024 tax year.

Colorado and Nebraska

Nebraska and Colorado are adjusting their gas tax rates, though less dramatically. Nebraska is adding a half-cent to its fuel tax (making it 30.5 cents per gallon). In addition to small road usage and environmental fee increases, Colorado's gas tax rate as of July 1 is 27.9 cents per gallon.

*It's important to note that state taxes are levied in addition to the federal gas tax of 18.4 cents per gallon of regular and 24.4 cents per gallon of diesel.

States lowering gas tax this summer

Not all states are increasing gas taxes. Starting July 1, you'll be paying a bit less at the pump in Kentucky, thanks to a decrease in the Commonwealth's gas tax. 

• The tax in the Bluegrass State will drop by 2.3 cents per gallon, bringing it down to 27.8 cents. 
• Savings for motorists are reportedly estimated to be about 32 cents per fill-up for a 16-gallon tank.

Maryland’s state gas tax decreases slightly on July 1, offering some relief at the pump. This adjustment is due to a law that adjusts the tax based on economic factors, sometimes resulting in reductions even when there is inflation. The average price for a gallon of regular in Maryland is about $3.56.

New gas tax: Bottom line

While gas tax increases may be unwelcome news for drivers, it's worth remembering that these taxes often fund infrastructure projects and environmental initiatives. 

Whether commuting to work or planning road trips, being aware of these tax changes can help you budget accordingly and consider more fuel-efficient alternatives (like states with low gas taxes) when possible.

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An irrevocable trust agreement must be designed, drafted and implemented to deal with two primary categories of taxes: 1) transfer taxes, such as gift and estate taxes, as well as the less common generation skipping transfer tax, and 2) income taxes, such as earned income taxes, income taxes on investment or capital gains taxes, which are income taxes on property appreciation after the property is sold or exchanged.

Either the irrevocable trust or an individual will pay taxes on all trust income. Trust income includes rents on real estate, profits produced by trust investments, the appreciation income from property sold or distributions of assets from the trust. Under the comprehensive tax rules, all trust income must be reported on either the trust income tax return (at trust tax rates) or on the tax return of the trust maker or beneficiary (at individual tax rates).

Putting this into different words, irrevocable trusts can be set up so that the trust maker no longer pays income taxes, and the taxes are instead paid by the trust. Note that the income tax rules for non-U.S. residents and non-U.S. citizens will vary quite a bit from the income tax rules we are discussing here.

Trust tax rates are much higher than individual tax rates

Why wouldn’t everyone want to set up an irrevocable trust so that they don’t need to individually pay income taxes any longer? The reason why most taxpayers are better off to pay taxes individually rather than having a trust pay income taxes is because trust tax rates are often much higher than individual tax rates.

The higher trust tax rates are due to the fact that an irrevocable trust has only hundreds of dollars in standard deduction, and an irrevocable trust pays the highest federal tax rate after just a few thousand dollars of income. Unless the irrevocable trust maker is already paying taxes at the highest marginal individual tax rate, it is almost always less expensive for the trust maker to keep on paying the trust income taxes.

Example. A trust maker with rental properties reads that they can stop paying taxes themselves by forming a trust. The trust maker asks an attorney to set up a trust with rental property LLCs so that the trust will pay taxes, thinking that the trust and LLC structure will save a lot of taxes. When the attorney calculates how much the trust would pay in taxes compared to the trust maker paying individually, the trust would pay more than two times more taxes! The attorney advises the trust maker that instead of having the trust pay taxes, the trust maker should set up a trust with “grantor” provisions so that the trust maker will continue paying taxes at the trust maker’s lower tax rates.

The fact is that most people would save on taxes by continuing to pay income taxes on the irrevocable trust income themselves, rather than having the irrevocable trust pay the income taxes at trust tax rates. The feature in an irrevocable trust that permits the trust maker or another person to pay trust income taxes is known as “grantor trust status.”

As a general rule, if an irrevocable trust is treated as a grantor trust, this means that an individual (typically the trust maker) will be treated as the owner of the trust income or principal, and the individual needs to include on their personal tax filings all items of trust income, deductions and credits as though the individual had received them personally — even if the trust didn’t distribute the income to them personally and the income stays in trust. Where several different people are treated as owners of different parts of the trust income or principal (multiple grantors), the taxes will be allocated between the different people.

It is important to note that we are primarily discussing federal income tax here, though many (but not all) state income taxes and state capital gains taxes follow the federal income tax laws.

To be certain we are clear, I’ll again point out that trusts deal with both income taxes (including earned income, investment income, losses, deductions and capital gains income taxes), and trusts also deal with transfer taxes (estate and gift transfer taxes, as well as generation skipping transfer taxes). On the transfer tax front, a trust may be designed to exclude assets from the trust maker’s gross estate (referred to as a completed gift trust), though the very same trust can be designed so that the income of the trust is taxed to the trust maker (grantor trust status).

Grantor trust rules are part of the tax code

The grantor trust rules are part of the Internal Revenue Code (IRC), which are found in Title 26 of the United States Code, the U.S. federal laws passed by Congress. More particularly, the grantor trust rules are found in Sections 671 to 679 of the IRC. The grantor trust rules generally provide that if the trust maker (or another person) has certain powers over the trust that are found in IRC Sections 673-679, the trust income will flow through to be taxed at the trust maker’s personal tax rates — and personal tax rates are almost always lower than trust tax rates.

A few examples of the powers that a trust maker can keep over the trust, so that the trust qualifies for grantor status and trust income is taxed to the trust maker, include generally: powers to invest (IRC 673); powers to reacquire trust assets, i.e. buy back trust property (IRC 673); powers to replace the trustee (IRC 675); powers to substitute property in the trust (IRC 675); power to use trust assets (IRC 677); power to veto distributions (IRC 678).

This sample list of grantor trust rules is very incomplete, and over time, billions of people with billions of needs have created millions of trusts with endless permutations of trust powers. This has caused the IRS, lawyers and tax court judges to spend countless hours determining whether bespoke and customized trust powers will cause trust income to be taxed to a grantor (usually the trust maker) or whether it should be taxed to the trust.

Complicating the matter of grantor trusts is the fact that some of the same trust income tax grantor powers will also cause a trust to be included in the gross estate and/or taxable estate of the trust maker. Again, estate tax is a different tax regime than trust income tax. For example, the power to revoke or amend the trust, a grantor trust power under IRC 676, will also cause a trust to be included in the grantor’s gross estate under a few different sections of the IRC (IRC 2036 and IRC 2038). In other words, a trust maker who retains the power to revoke or amend a trust (a revocable trust) ensures not only that the trust income is taxed to the trust maker, but also that the trust assets will be included in the trust maker’s gross estate.

Example. A trust maker forms a trust for a beneficiary, and the trust maker retains a “reversionary interest” under IRC 673 where the trust maker (or the trust maker’s estate) has the right to get back all of the trust property after the beneficiary dies. This grantor trust power will both cause the trust maker to be treated as the grantor for income tax purposes, and the trust property will also be included in the trust maker’s gross estate. The trust maker is happy with both tax results because the trust maker’s income tax rates are lower than trust income tax rates, and the trust property will get a step-up in basis by inclusion in the trust maker’s gross estate, although the trust maker will not owe any estate tax because the trust maker has adequate exemption from estate tax so that the trust maker’s gross estate is not taxable.

People who don’t have millions in wealth won’t pay estate taxes on their gross estates anyway, so the inclusion in the gross estate caused by grantor trust powers to amend under IRC 676 isn’t a problem at all. In fact, revocable trusts are usually the most tax-efficient type of trust for most people, who pay lower taxes individually compared to the higher trust tax rates, and a revocable trust also ensures that the trust property will qualify for a step-up in basis when the trust maker dies, under the capital gains rules of IRC Section 1014.

Because revocable trusts are both income tax and capital gains tax efficient, and revocable trusts are excellent for estate planning, revocable trusts are the most common type of trust. However, revocable trusts do nothing to protect assets, and revocable trusts don’t remove assets outside of the gross estate for people who have some wealth and need to avoid the estate tax.

Example. A trust maker engages an attorney to set up an irrevocable trust with the objectives of protecting assets and to avoid estate taxes on their estate. The trust maker has low tax basis in rental properties because the rentals were purchased 30 years ago when properties were considerably less expensive. The trust maker’s gross estate ( a concept similar to total net worth) is $5 million. The attorney advises the trust maker to form an irrevocable asset protection trust to hold the LLCs. The attorney drafts the trust to include provisions so that the trust maker retains grantor powers to pay taxes on the rentals by retaining rights to borrow against the rentals. The attorney also drafts the trust with provisions so that the trust maker retains rights to use trust income. When the attorney and trust maker meet, the attorney explains that the trust powers drafted in the trust not only cause the trust maker to pay taxes on the trust income — at income tax rates much lower than the trust would pay — but the powers also cause the trust-owned rentals to be included in the gross estate of trust maker. The trust maker is surprised that the attorney didn’t draft the trust to exclude the rentals from their gross estate, thinking that because the assets are included in the gross estate, the trust maker’s beneficiaries will need to pay estate taxes. The attorney explains that even though the rental properties are included in the trust maker’s gross estate, the trust maker has significant estate tax exemption, so the beneficiaries will not owe any estate tax. More important, because the low-basis rental properties are included in the gross estate, the inclusion in the estate will qualify the low-basis rental properties for a step-up in basis to the value at the time of death. This step-up in basis will save the beneficiaries significant capital gains taxes when the trust maker dies.

Why use a non-grantor trust vs a grantor trust?

Non-grantor trusts, defined as “complex” by the IRS, are trusts that owe income tax at the trust level and do not push out income and deductions to individuals. You may be wondering — if a non-grantor trust pretty much always pays the highest marginal tax rates, why would I want anything other than a grantor trust? Here is a scenario that illustrates when it could make sense to terminate the grantor trust powers and switch a trust to non-grantor.

Example. A trust maker has high income and is currently paying the highest marginal tax rate. The trust maker previously formed a completed gift trust that is outside of the trust maker’s gross estate, and the completed gift has grantor trust income tax provisions so that the trust income flows through to the trust maker. However, the completed gift grantor trust income is being taxed to the trust maker personally at their highest marginal tax rate. Put differently, the trust maker does not save income taxes by personally paying the trust income taxes. Further, a trust maker does not need or want to spend down the trust maker’s personal assets that are included in the trust maker’s gross estate — i.e. the trust maker’s personal assets are diminishing and/or the trust maker cannot afford to keep paying taxes on behalf of the trust. Because there is not an advantage (or even what could be a disadvantage) to having the trust maker continue to pay the trust income taxes since they are taxed at the highest rate anyway, and also because there is not an advantage for the trust maker to pay trust income taxes to spend down their personal assets (gross estate), the trust maker decides to terminate the grantor trust powers.

A trust maker will need to decide on a trust income tax provision (either grantor or non-grantor) that is best suited to minimize their taxes, depending on how much the trust maker earns. Keep in mind that a trust can include a renunciation of grantor trust provisions where the trust maker pays the taxes individually and later have the trust pay the taxes rather than the trust maker (or beneficiary) if that will lower the trust’s and individual’s total income tax burden.

However, a provision that terminates the grantor trust status must not be “toggled” on and off to avoid income taxes, or the IRS will challenge the trust. Additionally, a grantor trust can include a provision to reimburse the trust maker for the taxes they pay, though such a provision can pose gift tax risks or even estate tax inclusion risks if the tax reimbursement power is mandatory.

Another advantage of grantor trusts

Another powerful advantage of grantor trusts for estate tax planning is the ability of grantor trusts to reduce any assets remaining in the trust maker’s estate by having the trust maker pay the income taxes on trust income. If the property transferred into a trust is removed from the trust maker’s estate because the trust maker gave up possession, enjoyment and control over trust assets (a completed gift), rather than having the trust pay income taxes with trust property, the trust maker can pay the taxes for the trust. Using the grantor trust provisions to have the trust maker pay taxes on the trust property is the functional equivalent of the trust maker transferring more property into the trust.

Grantor trusts have been on the “green book” tax agendas of the IRS and several U.S. presidents who are keen to take away the powerful advantages that grantor trust status provides. Keep in mind that revocable trusts are the most common type of trusts, and revocable trusts are always grantor status. No one is trying to do away with revocable trusts, and the grantor trust status that is automatically afforded to revocable trusts won’t be challenged by Congress. Rather, the IRS and some U.S. presidents have been trying to do away with grantor trust advantages when the grantor trust provisions are used by trust makers to increase the value of large, complex trusts by having the trust maker continue to pay the income taxes on the trust using the trust maker’s personal assets that are still subject to estate taxes.

As much as the news focuses on using grantor trusts to reduce the potentially taxable gross estate, non-grantor trusts have become a high priority of states with high income tax rates, such as California and New York. In these states, high-income earners have been setting up trusts in other jurisdictions with no trust tax (places like Delaware, Nevada, South Dakota or Wyoming) and making the trust “intentionally non-grantor” so that the trust pays federal income taxes but avoids the high California and New York taxes.

The trust makers also make the trust incomplete for estate tax purposes so that the trust assets are purposefully included in the trust maker’s gross estate to get a step-up in basis for capital gains tax purposes. Both California and New York have passed laws that work contrary to the federal law so that the high-income-tax states can still tax the income of the non-grantor trusts.

Grantor trust income tax provisions are powerful because they permit a trust maker to pay the trust taxes themselves — and individuals almost always pay taxes at a lower rate than a trust. Additionally, when the income tax planning afforded by grantor trusts is paired with estate tax planning, grantor trusts are a powerful mechanism to effectively reduce the trust maker’s gross estate remaining outside of the estate tax-exempt trust.

However, caution must be exercised with the grantor trust rules because they interplay very closely with the estate tax and capital gains tax rules.

My next article will focus on how grantor trust provisions can have a significant effect on whether trust assets will be included in the gross estate of a decedent for computation of estate transfer taxes, and whether it is desirable to have trust assets included in the gross estate.

Other Articles in This Series

• Part one: To Avoid Probate, Use Trusts for Estate Planning
• Part two: How Quitclaim Deeds Can Cause Estate Planning Catastrophes
• Part three: Revocable Trusts: The Most Common Trusts in Estate Planning
• Part four: With Irrevocable Trusts, It’s All About Who Has Control
• Part five: Ins and Outs of Domestic Asset Protection Trusts (DAPTs)
• Part six: Irrevocable Trusts: Less Control Equals More Asset Protection

Related Content

• Six Benefits of Setting Up a Trust for Your Assets
• Estate Planning: Who Needs a Trust and Who Doesn’t?
• Eight Types of Trusts for Owners of High-Net-Worth Estates
• Four Reasons Retirees Need a (Revocable) Trust
• Four Reasons You Don’t Need a (Revocable) Trust

What to give

Donating cash is a simple, popular approach that allows charities to put the donation to use immediately. However, donating other types of assets may allow you to maximize the income tax advantages of charitable giving while still fulfilling your mission.

For example, donating appreciated securities is a great way to leverage your charitable giving from an income tax standpoint. Rather than selling those securities, paying capital gains tax and then donating the leftover cash to charity, you can make an in-kind donation of those appreciated securities directly to the charity. You will receive an income tax deduction for the donation, and the charity can sell the securities tax-free.

Another option is gifting a complex asset, such as an interest in a privately held business or real estate. This technique is often utilized when the owner is considering a sale of the asset. Similar to the approach of gifting appreciated securities, if you donate an interest in a complex asset that is later sold, you will reap the double income tax benefit of the charitable deduction and avoid capital gains tax on the portion that was gifted to charity upon a later sale.

Donors considering this technique should work closely with their advisers to identify a proper charitable recipient, as not all charities are equipped to hold complex assets. Timing of the gift is also an important consideration — if the gift occurs too close to the sale of the asset, the assignment of income doctrine may apply.

Finally, a qualified charitable distribution (QCD) from your individual retirement account (IRA) is an effective way to benefit charity while lowering your tax bill. If your taxable retirement account is subject to a required minimum distribution (RMD), you may direct up to $105,000 (in 2024) from that account directly to a public charity (excluding donor-advised funds). The amount distributed to charity counts against your RMD and will not be included in your taxable income for that year.

How to give

Beyond knowing what to give, it is equally important to know how to give. From direct contributions to split interest trusts, there are plenty of ways to give that best suit you and your family's plans:

Direct contributions. Direct contributions are one of the easiest ways to give to the charity of your choice. You can write a check or work with your financial adviser to wire appreciated securities directly to the organization. Gifts of complex assets require more planning, so you should consult with your financial, tax and legal advisers well in advance of making the gift.

Private foundation or donor-advised fund (DAF). These entities are a great way to create a philanthropic legacy and get your children or other family members involved in your charitable mission. While private foundations and DAFs both make grants to charities, there are key differences between the two, so donors should work with their advisers to determine which vehicle makes the most sense given their goals.

Split interest trust. A split interest trust, such as a charitable remainder trust or charitable lead trust, is a good option for those looking to benefit a charity while also shifting assets to family members or even retaining an income stream for themselves. These are irrevocable trusts that are split into an income interest, which is for a set term, and a remainder interest, which is the balance of assets at the end of the term.

Who should you give to?

After determining how and what you'd like to give, it's time to consider where your donations will go. With more than 1.54 million charitable organizations in the U.S., it's essential to vet these organizations and ensure their missions align with your values.

Unfortunately, donors can often be exposed to scams that seek to benefit from their good intentions and generosity. Before donating, it is important to ensure that your contribution is going to the intended recipient. There are several ways to vet charitable organizations and make an informed decision.

Make sure the charity is in good standing. Use the IRS website's function to research an organization’s standing. Search for a charity by name or employer identification number to find out when an organization was first recognized as tax-exempt, if its tax-exempt status has been revoked and whether contributions are tax-deductible.

Conduct a financial health check. Charitable organizations are required to make their three most recent tax returns available to the public. Review a charity’s tax returns (Form 990-PF for private foundations and Form 990 for other exempt organizations) and supporting documents for its annual income and expenditures, including grants made and salaries paid. Federal returns can be found on the IRS website, and returns for the state(s) in which the charity is registered can be found on the state’s attorney general website. You can also go beyond the numbers and review the organization’s most recent annual report for more detailed information on what a charity has done in the past year to further its mission. This can often be found on the charity’s website.

Get involved. To really get to know an organization before you donate, consider reaching out to see if volunteer opportunities are available. In addition to a financial contribution, you would donate another valuable resource — your time — while gaining an insider perspective on how the charity allocates resources and serves its community. If you are considering volunteering, it can be helpful to contact the charity you are interested in and ask if you can interview current volunteers, donors or board members.

Creating a philanthropic legacy

As you develop a philanthropic strategy, you have an opportunity to involve younger generations. Ask for their help in the vetting process and talk about what causes are important to them. If you have a family foundation or DAF, ask for their input on grants and how and why they chose recipients. Older adolescents may eventually serve as a trustee of or be employed by the family foundation.

When you involve the next generation, this kind of planning evolves past charitable giving and creates an impactful, lasting legacy for you and your family.

The views and opinions expressed are for informational purposes only and are current as of the date of the publication and may be subject to change. Neither, Brown Brothers Harriman, its affiliates, nor its financial professionals, render tax or legal advice. Please consult with an attorney, accountant, and/or tax advisor for advice concerning your particular circumstances.

Related Content

• How to Assess the Impact of Your Charitable Giving
• What to Do if Your Passion for Charitable Giving Has Flagged
• Considering Donating to Charity? Here’s a Road Map to Steer Your Choices
• How to Maximize Your Impact With Strategic Philanthropy Tools
• How Estate Planning Can Thwart the ‘Third-Generation Curse’

But you don't have to reside in Nevada to take advantage of some of these benefits. At the Whittier Trust Company of Nevada, many of our clients live in California, but we serve as their trustee—because what matters is the state in which your trust is administered.

Advantages of irrevocable trusts

This geographical choice has the greatest implications when it comes to the benefits incurred through an irrevocable trust. Most people are familiar with revocable, or living, trusts, which are relatively simple to set up and can be modified at any time, changing beneficiaries and managing the assets within the trust as you like. Why, then, would anyone opt for an irrevocable trust, which can't be modified without legal action? 

The answer is that an irrevocable trust offers greater protection and tax benefits. It effectively removes your taxable estate assets, freeing them from estate tax after you pass. It also shields your assets from creditors in the event you are sued. This safeguard can be particularly important for attorneys, doctors, and other professionals at high risk of lawsuits. 

Because of these significant protections, irrevocable trusts can be difficult to set up. Our Whittier team includes qualified fiduciaries and expert investment advisers to help clients weigh all options. We consider not only state taxes but also other laws, such as privacy issues in regard to public record laws for trusts in different states. We take the time needed to understand each client's lifestyle and long-term goals, applying those objectives to the purpose and implications of the trust.

Nevada 1-2-3

Once a client has decided that an irrevocable trust is the best fit, we often suggest that we administer that trust from Nevada because of the three key benefits: no state income tax, no state estate tax, and no state inheritance tax. In short, you can accumulate wealth in Nevada and pass it to future generations with minimal taxation. In California, any income from your trust could be subject to state taxes. If, for example, you have a $10 million trust in California and it generates $500,000 in annual income, you could lose upwards of $100,000 per year to taxes. 

Nevada also allows for the appointment of a trust protector, in addition to a trustee, who can modify your trust terms if your circumstances change. What's more, in Nevada, you can start planning for 25th-century relatives because 365 years is the limit of the "dynasty trusts" offered in our state. 

Foreseeing complications

Estate and trust rules differ significantly from state to state, and it quickly gets complicated. Some states require that a trustee or beneficiary be a state resident, while others tax any trust set up by a resident of that state, no matter where the trustees or beneficiaries live. 

As much as I love California, I can't help but use their far-reaching tax laws for comparison (you pay a price to live in paradise!). If you set up your trust in Nevada or some other tax-friendly state, California may try to claim taxes if you use California employees to administer the trust. If a trustee dies and the successor trustee lives in California, the trust is now at risk of getting taxed in California. The bottom line is that it is best to work with your professional advisers to eliminate the possibility of exposing your trust to the long arm of the California Franchise Tax Board. 

Tax law is ever-changing as well. For example, beginning in 2024, California was able to tax trusts called Incomplete Non-Grantor Trusts (ING trusts), even when they were managed in Nevada (NINGs), but because we anticipated this change, our team was able to help clients pivot to lessen the impact of the new legislation. 

Few trust companies have more experience negotiating the finer points, financially speaking, of the California-Nevada relationship than Whittier Trust. Whatever state you choose, or even if you choose both—living in California with your trust based in Nevada—Whittier Trust will work to safeguard your family's financial future as we have for multiple generations of clients, protecting your assets and your legacy for beneficiaries for many years to come. 

It made me think what the “easy swing and follow-through” of retirement planning is. In other words, what are the simple fundamentals that will lead to good results?

Let’s start with that easy swing.

1. The alignment of your stance is the equivalent of your financial plan.

In its purest sense, your financial plan ensures that your assets are aiming in the direction of your values and goals. If you want to help ensure your plan is on the right track, you can build one for free here.

2. Your club equals your asset allocation.

It’s just as tempting to buy Nvidia (NVDA) right now as it is to try to drive that short par 4. It’s probably better to swing easy and get there a bit more slowly rather than lose your ball in the water because you were greedy. Putting it more concisely, don’t swing for the fences if you’re retired or about to be.

3. The actual swing equals what you can control.

In golf, you can’t control the conditions. In retirement planning, you can’t control the market or the economy. Here are the things you can control and should focus on:

Cost. According to S&P Global, over 87% of all active large cap mutual fund managers did worse than the S&P 500 over the last 15 years, ending December 31, 2023. Why? Cost is one of the biggest drivers of underperformance. It creates a hurdle that fund managers must, but often don’t, overcome. It’s the biggest reason we don’t like to have mutual funds in our client portfolios. Of course, there is a time, a place and even a few winners, but we take the sure thing of low-cost.

Consolidation. All of your accounts tell a life story. I had this 401(k) from that employer. I signed up for this bank account to get a $500 bonus. In retirement, simple beats optimal. There are so many flexible, low-cost investment platforms that there is no good reason to have a lot of different investment accounts. They become too hard to manage and withdraw from, and they create a mess for your beneficiaries.

Asset location. This is the lesser-known cousin of “asset allocation.” Try to hold the right type of investments in the right places. For example, income from REITs is considered ordinary income, so REITs should be held in a retirement account. Growth stocks tend not to pay dividends, so they should be held in taxable accounts.

The follow-through includes the things that, even if you do easy-swing issues one through three above correctly, can prevent your ball from flying according to the plan. Here are the biggest misses I see on the follow-through:

1. You’ve done no tax planning.

We’ve all heard the saying, “It’s not what you make. It’s what you keep.” This is that. I’ve seen people so focused on getting their investments perfect that they miss big tax opportunities and end up paying six or seven figures more than they have to in retirement, in taxes.

2. You’re not sufficiently insured.

Insurance planning changes in retirement as you shift from insuring your income and liabilities to insuring against major health events. Many people have no choice but to accept the fact that going into nursing care for a prolonged period will wipe them out. Most of our clients want some sort of protection against this risk, even if it’s just the equity in their home.

3. You didn’t follow through on the estate planning.

Drafting a will and/or trust is not enough. There is typically a set of instructions on assets that need to be retitled or beneficiaries that need to be designated. Until this happens, you just have a big binder full of paper.

It turns out there’s more than I thought to an easy swing and a follow-through. I’m feeling better about my golf game already.

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• Roth Conversions: The Case for and Against Them
• Are You a Baby Boomer With Too Much Cash? Three Scenarios for What to Do
• Asset Allocation for Retirees: Five Things to Consider
• Four Actually Legit Reasons to Take Social Security Early