Friday, September 26, 2014

Limits On Tax-Free Lifetime Gifts Projected To Rise For 2015

It keeps getting less taxing to die rich. Based on inflation data released today by the Department of Labor, Wolters Kluwer , CCH has projected inflation-adjustments to various tax figures that affect financial planning for the well-off: the federal and gift tax exemption amount, the annual gift tax exclusion amount and the kiddie tax threshold.

The federal estate tax exemption—that’s the amount an individual can leave to heirs without having to pay federal estate tax—is projected to be $5.43 million, up from $5.34 million for 2014. That’s another $90,000 that can be passed on tax-free. The top federal estate tax rate is 40%. Talk about tax savings.

The gift tax is tied to the estate tax, so the inflation indexing helps the wealthy make the most of tax-free lifetime giving too. You can make the gifts during your lifetime; just you have to keep track of them as they count against the eventual estate tax exemption amount. In other words, you can’t double dip. So a woman who set up a trust for her kids with $5 million a few years ago could make new gifts to add to the trust and bring it up to the $5.43 million amount. A husband and wife each get their own exemption. So a couple would be able to give away $10.86 million tax-free in 2015 (assuming they haven’t made prior lifetime gifts).


Totally separate from the lifetime gift exemption amount is the annual gift tax exclusion amount. Wolters Kluwer, CCH projects it won’t budge at $14,000 a year for 2015, the same as 2014, up from $13,000 a year in 2013. But it can be leveraged to add up. You can give away $14,000 to as many individuals as you’d like. A husband and wife can each make $14,000 gifts. So a couple could make $14,000 gifts to each of their four grandchildren, for a total of $112,000. The annual exclusion gifts don’t count towards the lifetime gift exemption.

If you want to make gifts and not have to bother to keep track for gift tax purposes, you can make gifts for medical, dental, and tuition expenses for as many relatives (or friends) as you’d like if you pay the provider directly. These gifts don’t count towards any of the limits.

With the federal estate tax exemption rising, most people won’t need to use the annual gift exclusion to whittle down their estates. But it’s a tool you can use if you live in one of 19 states plus the District of Columbia that impose separate state death tax levies. Forbes has an interactive map showing the states with death taxes (estate and inheritance taxes) in 2014 and in 2015.


One thing to watch out for if you’re making gifts to younger members of the family is the federal kiddie tax. The kiddie tax, which covers students through the age of 23, puts investment income, above small amounts, into the parents’ tax bracket. For 2014, the kid pays no tax on the first $1,000 of unearned income and then a 15% rate on the next $1,000. Wolters Kluwer, CCH projects the $1,000 base will go up to $1,050 for 2015–a little help.

The Internal Revenue Service will release the official figures in the fall.