At this time of year, we think about gifting for the holiday season. While gift-giving is considered an act of kindness, it can also be an important estate planning tool.
You may wish to give away assets during your life so they are not included in your estate and subject to tax upon your death. However, you need to consider the tax laws that may apply.
According to the IRS code, a gift is a voluntary transfer of property from a donor to a donee without full and adequate consideration. An individual may give gifts up to $14,000 each year to as many individuals as he or she wishes without incurring gift tax. A married couple can make joint gifts up to $28,000 each year.
This $14,000 exclusion does not apply to gifts to charities or gifts between spouses. There is no limit to how much an individual may give their spouse or charities each year. Also, payment of medical expenses, or payment of school tuition of another is excluded.
If you give an individual $20,000 during the year, which exceeds the $14,000 limit, you will have to file a Federal Gift Tax Return for the year, but will probably not have to pay any tax. The IRS code permits a $5,430,000 lifetime exemption for each of us from Federal Estate/Gift taxes. Therefore, until you give away more than the $5,430,000, no Federal Gift Tax is due. If you do not exhaust your federal exemption during your lifetime, your estate will able to use it as an exemption for federal estate taxes after your death.
In addition to Federal Gift Tax, one must consider Pennsylvania Inheritance Tax when contemplating gift-giving. The inheritance tax is a tax on assets that are inherited by your heirs upon your death. There is no inheritance tax on assets passing to your spouse. If you transfer an asset to another individual during your life for the purpose of avoiding the inheritance tax, you must live for one year after the date of transfer or the asset, less a $3,000 exemption per donee, will be counted as part of your estate at death. For example, if Mr. Smith transferred his home to his son on March 15, 2014, and then Mr. Smith died on February 28, 2015, his home would still be considered as an asset of his estate subject to Pennsylvania Inheritance Tax, since he failed to survive for a year after making the transfer.
Gift-giving is an estate planning tool to provide for your family and friends during your lifetime, while simultaneously making plans to avoid taxes upon your death. During this busy season, take the time to consider gift planning for you and your family.
Finally, the IRS has announced the 2016 Estate and Gift Tax limits. The exemptions will increase in 2016 to $5,450,000 ($5.45 million) from $5,430,000 ($5.43 million) for 2015. Therefore, you can leave $5.45 million to your heirs and pay no Federal estate or gift taxes. If you are married, both you and your spouse can each claim the $5.45 million exemption, for a total of $10.9 million.
The annual gift tax exclusion of $14,000 will remain the same in 2016.