This column first appeared in the San Antonio Express-News and the MySA website on January 14, 2015.
Dear Mr. Premack: It is a new year. What has the IRS done with the federal estate tax for 2015, and what about the gift tax? – I.R.
The federal estate tax is imposed upon an individual’s death when that person’s estate exceeds a certain limit. Under the law which took effect on January 1, 2013 the exemption was set at $5 million per person. The exemption was designed to increase each year for inflation, and in 2014 had increased to $5,340,000 per person. [In 2016 the exemption is $5,430,000 per person, and in 2017 the exemption will be $5,490,000 per person.]
The IRS has announced that for year 2015, the exemption amount has been increased to $5,430,000. This $90,000 increase helps to offset the appreciation in asset values which tends to accumulate from year to year.
A married couple can each legally use the exemption, doubling the value of their tax-exempt estate to $10,860,000 for 2015. To take advantage of this doubling, the couple must either make an estate plan with proper shelter trust planning, or the survivor must elect “portability” of the deceased spouse’s exemption by filing an estate tax return with the IRS within 9 months of the first spouse’s death.
The federal estate tax rate remains at 40%. For example:
When an unmarried person dies leaving an estate which exceeds the exemption, the 40% tax is imposed on the excess. If an unmarried individual with an estate of $7,000,000 dies in 2015, the estate may be subject to taxes of approximately $628,000. (7,000,000 minus $5,430,000 is $1,570,000, times 40% is $628,000.)
If a married couple had an estate of $14,000,000 and properly used both the unlimited marital deduction and doubling of the exemption amount, then after the second death the combined estates would be subject to the 40% at equaling approximately $1,256,000.
The federal gift tax is imposed on any gift you make in excess of the annual exemption. Many years ago the exemption was merely $3000. In the mid-2000’s the exemption was increased to $10,000 with a formula to be increased for inflation. Under the formula, the exemption was eventually increased to $14,000, and the formula did not allow for an increase in 2015. Thus, the annual gift tax exemption remains at $14,000 for year 2015. [The formula did not allow for an increase in 2016 or in 2017, and the exemption remains at $14,000 through at least the end of 2017.]
In addition to the annual exemption, each individual has a lifetime exemption from gift taxes. That exemption was increased in 2015 to match the estate tax exemption: $5,430,000. To use any part of the lifetime exemption, a gift tax return must be filed with the IRS for the year that the gift exceeded $14,000.
For example: Steven inherited a house from his aunt. It is valued at $120,000. He already has a house, but his brother does not, and Steven decides to transfer title to his brother. This is a gift from Steven which exceeds the annual exemption. Thus, for the tax year of the transfer Steven must report to the IRS that he made a taxable gift of $120,000.
His annual exemption reduces the taxable gift to $106,000, and he can apply his lifetime exemption to reduce the tax to zero. However, in the future his lifetime exemption will be reduced by that $106,000. For most people, the lifetime exemption eliminates any negative impact that the gift tax would have had.
You should consult with your Elder Law attorney before making large gifts, to be certain that the gifts work within the framework of your estate plan.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and business entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.