By Roy Schneider, Esq.
If you’re like most people, you want to make sure that you and your loved ones pay the least amount of tax possible. Many use year-end gift giving as a way to transfer wealth to younger generations while also reducing the overall estate tax that will be due upon their death. Below are some steps you can take to make gifts to your heirs without triggering gift tax liability. Some of these techniques may also reduce your own income tax liability.
A combination of estate and gift tax exemptions can be used to significantly reduce the overall tax liability of your estate. Upon your death, federal estate tax may be owed. A portion of your estate is exempt from the tax. That exemption amount is set by Congress and can change from year to year. For deaths that occur in 2011, the exemption amount is $5 million and the value of an estate in excess of that amount is subject to estate tax. The exemption amount is set to drop to $1 million dollars on January 1, 2013 with a 55% estate tax rate.
Many taxpayers make annual gifts to loved ones over the duration of their lifetimes to reduce the overall value of their estate so that it does not exceed the exemption amount in effect at the time of death. It is important to consider that gifts made during your lifetime can also be subject to a gift tax (equal to the estate tax). However, certain gifts or transfers are not subject to the gift tax, enabling you to make tax-free gifts that benefit your loved ones and reduce the overall taxable value of your estate upon your death.
The annual gift tax exclusion allows each individual to make annual gifts of up to $13,000 to each recipient. There is no limit to the number of recipients who may each receive up to $13,000 totally tax-free. Married couples may gift up to $26,000 to each recipient without triggering any tax liability. This annual exclusion expires on December 31 of each year, and larger gifts may be made by splitting it up into two payments. By making a payment in December and one the following January, you can take advantage of the gift tax exclusion for both years. Keeping annual gifts below $13,000 per recipient ($26,000 for married couples) ensures that no gift tax return must be filed, and that there is no reduction in the estate tax exemption amount available upon your death.
Annual gifts may also be made in the form of contributions to a §529 College Savings Plan. These, too, are subject to the $13,000 annual gift tax exclusion. Additionally, such contributions may afford the giver with a state tax deduction.
Payment of a beneficiary’s medical expenses is also excluded from the gift tax. There is no limit to the amount of medical expense payments that may be excluded from tax. To qualify, the payment must be made directly to the health care provider and must be the type of expenses that would qualify for an income tax deduction.
If you have a large estate that may be subject to taxes upon your death, making annual gifts during your lifetime can be a simple way to reduce the size of your estate while avoiding negative tax consequences.
Don’t let yourself be caught unprepared. Contact us today to review your estate plan and ensure that your assets are appropriately managed. Let us create the best possible scenario for you and your loved ones, both during your lifetime, as well as after your death.