Posted Under: Defending and Planning Against Taxes,Estate Planning and Probate,Minimizing New Jersey Death Taxes
The IRS recently increased the annual gift tax exclusion from $13k to $14K in 2013. The annual gift tax exclusion is the amount you and your spouse can each gift to anyone without dipping into your lifetime gift tax exclusion. Beyond direct gifts there are many strategies to gift.
The $14,000 annual tax exemption rule (called the “annual exclusion”) is pretty straightforward. For instance, if you give $20,000 to someone, $14,000 of it is exempt from gift tax, but you must pay gift tax on the remaining $6,000.
Lifetime Exclusion: The lifetime exclusion equivalent parallels the estate tax, so for those who wish to make a large gift in 2014, the exclusion is now $5,250,000. To calculate how much you may have available, you need to add all prior “taxable gifts” made after 1/1/1977. Prior to 2010, the maximum lifetime equivalent amount was $1,000,000; so many people had used up this $1,000,000 exemption. If you previously used the $1,000,000 exemption you would have $4,250,000 left to give away during your lifetime with no gift tax due. If you had previously given away $5,120,000, which was the maximum in 2012, then you can give away an extra $130,000 in 2013.
Couples: Double Your Exclusion
Couples can combine their annual exclusions, meaning that they can give away $28,000 worth of property tax-free, per year, per recipient. In fact, even if only one spouse makes a gift, it’s considered to have been made by both spouses if they both consent.
Gifts to Your Spouse
All gifts you make to your spouse are tax-free, as long as he or she is a U.S. citizen. If your spouse isn’t a citizen, the limit on tax-free gifts is $143,000 in 2013.
Timing Your Gifts
To make the most of the annual exemption, keep in mind that it is based on a calendar year. If you miss a year, you can’t go back and claim that year’s exemption amount. But if you spread a large gift over two or more years, you may escape gift tax complications. For instance, if you give your daughter $20,000 on December 17, $6,000 of it is taxable. You’ll have to file a gift tax return (by April 15 of the next year), and you’ll use up $6,000 of the total amount you can give away or leave free from estate tax. But if you give your daughter $10,000 in December and wait to hand over the other $10,000 until January 1, both gifts are tax-free.
Giving Away Non-Cash Property
Not only gifts of cash can be spread over several years. You can give away some stocks now, some next year. You can even give real estate in pieces — physical pieces, if that’s possible, or pieces (percentages) of ownership.
Gifts to Children
Giving children valuable property before they are adults raises the important question of who will manage the property for the child. If you give a large gift to a child under 18, an adult must be responsible for the money.
Fortunately, it’s easy to arrange for an adult to manage the property, by setting up either:
- an irrevocable child’s trust, or
- a custodianship authorized by state law.
As in the past, gifts made directly to medical providers, or educational institutions are not considered reportable gifts.
Anyone can still set up IRC Section 529, educational plans, and can spread the amount contributed over 5 years. So if in 2013 you wanted to fund a 529 plan, you can contribute $70,000, and we can file a gift tax return and elect to spread this $70,000 over 5 years, $14,000 per year.
New Jersey/New York State Estate Tax
New Jersey or New York State Estate taxes have not changed. Gifting is an excellent strategy to avoid any state estate tax. There is NO THREE YEAR LOOK BACK RULE to bring back the gifted assets. The THREE YEAR LOOK BACK RULE applies only to gifts of life insurance.
Our firm has helped hundreds of clients minimize and sometimes entirely avoid the state estate taxes.