In late October, the IRS announced that it would be raising the lifetime gift and estate tax exemption limits from $5.45 million per individual (or $10.9 million for a couple) to $5.49 million per individual (or $10.98 million per couple). Although the change may seem small at first glance, at the current gift and estate tax rate of 40%, this means that a couple can hypothetically save $32,000 in gif/testate taxes by taking advantage of the higher exemption.
How the Gift and Estate Tax Works
The gift tax and estate tax are two different taxation systems, but the lifetime exemption applies concurrently to both of them. With the gift tax, you are taxed on any portions of an annual gift to any individual over $14,000. Thus if you gift your nephew $2,000 a month for a total of $24,000 a year, then you would face a gift tax for the $10,000 over the $14,000 limit. That said, you can apply the $10,000 to your lifetime exemption, meaning you could now make gifts over the $14,000 per individual annual limit with a lifetime total of $5.49 million – and your spouse could do the same – without paying any gift tax because your lifetime gifts fit within the current exemptions.
That said, the size of your estate is combined with your lifetime gifts over the annual limit when you and your spouse die, so if you and your spouse did indeed make gifts over the limit totalling $10.98 million in your lifetimes, then any remaining portion of the estate would be subject to the estate tax. And if you had given $2 million in gifts over the limit during your lifetime, then $8.98 million of your estate would be exempt from the estate tax and any amount over $8.98 million would be subject to the estate tax.
How the Gift and Estate Tax Might Change
Keep in mind, however, that both the exemption amounts and tax rates applicable to gift and estate taxes do change, especially when there is a change in the Oval Office. Donald Trump says he will eliminate the estate tax entirely, while Secretary Hillary Clinton says she will reduce the lifetime exemptions to $3.5 million while increasing the tax rate to a graduated rate of 45% to 65%.
Contact a Pasadena Estate Planning Attorney Today
Estate planning and probate attorney Christopher B. Johnson, located in Pasadena, California, has years of experience in all aspects of estate planning, and works with clients to reduce their gift and estate tax burden both during their lives and once they pass. To request an immediate consultation regarding any aspect of estate planning, contact him today at (877) 755-9178.