by Stephen Berardino
The new legislation places the estate tax exemption amount at $5 million and is indexed each year for inflation. The inflation-adjusted estate tax exemption amount for 2013 is $5.25 million per individual. Estates that are worth more than that amount are subjected to a 40 percent tax of the overage.
The gift tax lifetime exemption is also $5 million and is indexed each year for inflation. Similar to the estate tax, the inflation-adjusted lifetime exemption amount is $5.25 million for 2013. The gift tax rate has also increased to 40 percent on gifts made above the lifetime exemption amount. It is also important to remember that it is giver’s responsibility to pay any applicable gift tax, not the receiver’s. In addition, the gift tax annual exclusion amount has increased in 2013 to $14,000.Unlike the lifetime exemption which applies to total gifts made during a person’s lifetime, you can take advantage of the $14,000 exclusion every year. The annual exclusion is measured on a “per recipient” basis. This means you can make as many gifts as you desire, without having to file a gift tax return or using any portion of your lifetime exemption amount, as long as no one gets more than $14,000 in a year. If you are married, you and your spouse may combine your annual exclusion amount to gift up to $28,000 per recipient. The annual exclusion amount does not count against your lifetime exemption. For gifts exceeding the annual exclusion, the difference between the gift and the annual exclusion is deducted from the lifetime exemption amount.
A surviving spouse’s ability to make use of the exemption that was not used up by a deceased spouse, known as portability, was made “permanent” by the American Taxpayer Relief Act. Portability allows married persons to add any unused portion of his or her spouse’s estate tax exemption to their exemption amount. For example, if a husband dies in 2013 and has used $3 million toward his exemption, the $2.25 million unused amount may be used to increase his wife’s estate tax exemption to $7.5 million (her $5.25 million exemption plus his unused $2.25 million exemption). It is important to note that this portability is not automatic. In order to take advantage of the portability provisions, the surviving spouse must file a timely estate tax return (IRS Form 706) for the deceased spouse’s estate. Failure to file a timely return will result in the loss of the deceased spouse’s exemption amount.
Educational and Medical Exclusions
Certain payments qualify for education and medical exclusions to the federal gift tax. This means that you can pay for qualified educational or medical expenses of another and also give that individual an additional $14,000 in the same year without incurring any gift tax.<
The educational exclusion allows you can make payments directly to qualified institutions that are not subject to federal gift tax. For a payment to qualify for the educational exclusion you must submit it directly to the educational institution, not to the individual receiving the education. Also, this payment must be used exclusively for tuition. This means that if you pay for books, room and board or other types of educational expenses, your payments will be subject to the gift tax if they exceed $14,000. Additionally, a giver may combine up to five years worth of exemptions, or $70,000 per recipient, as a contribution to a 529 college savings plan without gift tax implications. However, no other gifts to that recipient are allowed for the five year period.
Payments made directly to medical care facilities or medical insurance companies are also excluded from the federal gift tax under the medical exclusion. Similar to the educational exclusion, these payments must be made directly to the medical care facility or to the medical insurance provider, not to the individual receiving the medical care.
It is important to be aware that the giver’s “cost basis” in the item transfers to the recipient if the item is transferred during the giver’s lifetime. Therefore, the capital gains tax on a sale will be measured from the item’s value at the time it was acquired by “the giver” and not the value on the date the gift was received. In contrast, if you inherit assets after the giver’s death, the “cost basis” jumps to the full market value as of the date of their death and the receiver would owe no capital gains tax on prior appreciation.
Not all capital gains are treated equally, and the tax rate can vary depending on how long you held the asset. If you hold an investment for one year or less, you will be subject to short-term capital gains tax at your regular income rate. If income tax rates go up, or if your capital gains bump you into another tax bracket, you will pay whatever income tax is “normal” for you. Assets held for longer than one year are subject to long-term capital gains tax that can range from 15% to 20% depending on your tax bracket. Also beginning in 2013, taxpayers at or above certain income thresholds will be subject to an additional 3.8% Medicare surtax on capital gain income, which could result in an overall rate of 23.8%.
Due to the ever-changing tax laws, the influx of mass information on the Internet, and the fact that there is no “one size fits all” advice for anyone trying to maximize asset savings, the best way to ensure that “gifting” or any other choice affecting your estate is in your best interest is to consult an estate planning attorney.