Gift giving throughout your lifetime is a great way to share your wealth with those you care about, while helping reduce your estate taxes. For taxpayers interested in gifting, some important tax consequences will need to be considered.
Estate Tax Exclusion
Each year, the government adjusts the estate and gift tax exclusions for inflation. For 2016, the IRS increased the lifetime estate tax exclusion to $5,450,000 while the annual gift tax exclusion remains at $14,000. The lifetime estate tax exclusion allows taxpayers to give up to $5,450,000 tax-free, but it disregards the gifts that qualify under the annual exclusion. This means that a taxpayer will only dip into the lifetime exclusion for gifts given to a recipient that exceed the annual gift tax exclusion amount ($14,000 for 2016) in a single year.
Single taxpayers can give up to $14,000 each to any number of persons in a single year without incurring a taxable gift. Neither the recipient nor the donor will owe tax on gifts up to the $14,000 threshold. Both the estate tax exclusion and gift tax exclusion double for spouses splitting gifts.
For elderly taxpayers, gift giving can be an important aspect of estate planning. Let’s say you have a taxpayer who is 100 years old and wealthy i.e. their net worth exceeds $5,450,000. When the taxpayer gives gifts, those gifts will not flow into the estate of the taxpayer when they unfortunately pass away. If they choose not to give, the money, property, stock, etc. will flow into their estate and will face the inheritance tax. For estates in excess of the exemption amount, the inheritance tax is currently 40%. Gifting allows taxpayers to pass their wealth to their loved ones rather than to the government through the inheritance tax.
If you are thinking about gifting, the type of gift will also be something to consider due to tax ramifications. Contact an Anders advisor to help you decide what gift will be the most beneficial for you and for your unique situation.All Insights