The first quarter of 2024 brings some substantial changes to how financial gifts will be taxed moving forward. In this article, we are going to focus on two key changes that may impact how you currently invest funds to support your beneficiaries in the future: a new option for excess 529 plan funds and the changes in the estate tax exemption.

Excess Funds in 529 Accounts

Many people rely on 529 accounts as a method to assist children and other family members with saving for college. However, it can be difficult to estimate the exact cost, and many accounts end up with leftover funds that families are unsure how to best utilize. This is where the new provision in the Secure Act 2.0 provides a new avenue for utilizing those funds.

As of January 2024, unused 529 funds, up to $35,000, can be rolled over into the account beneficiary’s Roth IRA. This transfer will not incur the 10% penalty for nonqualified withdrawals or generate any taxable income. While this may seem like a viable option for those with excess funds stuck in a 529, there are several things to consider before making the move.

• Holding Period: The 529 account must be at least 15 years old before any funds can be transferred.
• 5 Year Rule: Any 529 account contributions from the past five years before distribution starts are ineligible for the tax-free rollover, including any associated earnings.
• Annual Limit: The amount rolled over into the 529 account cannot exceed the annual Roth IRA contribution limit.
• Ownership: The beneficiary of the 529 must also be the owner of the Roth IRA, with an earned income at least equal to the amount of the rollover.

The Secure Act 2.0 provides this valuable option for investors to utilize unused 529 funds, but previous solutions for this issue have provided successful alternatives. Parents can switch designated beneficiaries to continue using a 529 account for qualifying educational expenses. $10,000 of 529 plan funds can be utilized to pay off qualifying student loans. Alternatively, if a child earns a tax-free scholarship, parents can take the equivalent amount out of the 529 plan without the 10% penalty, though they will still be liable for tax on the earnings portion of the distributions.

Overall, this presents a strong option for investors to consider when addressing excess 529 account funds. However, anyone considering this option should consult a tax professional to ensure they are utilizing the best option for their funds and planning accordingly.

 Increases in the Gift Tax Exemption

 January 2024 marks a rise in the federal estate & gift tax exemption from $12,920,000 to $13,610,000 per person. The combined exemption for married couples is now $27,220,000. This new rate will protect a substantial majority of the estate from federal taxes.

However, this rate rise is set to sunset on January 1, 2026, to the pre-2018 exemption amount of $5,000,000 per person with an index for inflation. Absent of any legislative changes, this will significantly impact many high value estates, and higher net worth individuals and families should make plans now to adjust their strategy to offset this lower threshold for the 40% federal tax rate.

Anyone with a high value estate should speak with a financial advisor to reassess your estate planning strategy before 2026. Discuss potentially making changes to any revocable and irrevocable trusts, gifting, and other estate planning tools to minimize future tax liabilities.

Conclusion

 Overall, 2024 brings several key considerations for gifting and estate planning that investors and families should consider as they plan for the future. While no one strategy works for every individual, understanding potential tax implications can allow you to plan for your specific circumstances. At Capossela, Cohen, LLC, we are here to help our clients navigate the complicated and ever-changing tax landscape to ensure their long-lasting financial wellbeing. Speak with one of our tax consultants today to learn more about how we can support your goals.