Income tax, payroll tax, capital gains tax – the fiscal-cliff law passed in January changed many areas of the Internal Revenue Code, including one you might not have focused on lately: estate and gift taxes. Here’s what you need to know.
What’s the current estate and gift tax exclusion? The exclusion is the amount you can transfer during your lifetime and via your will before estate or gift tax is due. It consists of two items. The basic exclusion is $5 million, and is adjusted for inflation annually. For 2013, the basic exclusion after inflation adjustments is $5,250,000.
The second part of the applicable exclusion benefits married couples. When you’re married, your total exclusion can also include the unused portion of your deceased spouse’s basic exclusion. Executors make this “portability” election by filing an estate tax return, even if an estate is not taxable and might not otherwise need to file.
Your personal basic exclusion plus the power to take advantage of portability means you and your spouse can transfer up to $10.5 million to your heirs, free of estate and gift tax.
Can you still make tax-free annual gifts? Yes. During 2013, you can give to as many people as you choose up to $14,000, gift-tax free. If you’re married, you and your spouse can combine your individual $14,000 annual exclusions and give up to $28,000 gift-tax free this year. As long as your gifts remain under the annual exclusion amount, they have no impact on your $5.25 million exclusion.
You can also make unlimited payments for unreimbursed medical expenses and tuition, gift-tax-free, when you pay the fees directly to the medical care provider or qualified school. These payments are not considered gifts and do not reduce your applicable exclusion, even if the people who benefit are unrelated to you.
Gifts between spouses are also excluded from gift tax, though an annual limit applies when your spouse is not a U.S. citizen.
If your total assets are less than $5.25 million, do you still need an estate plan? Yes, and here’s why: Your estate plan encompasses your will, beneficiary designations, asset titling, trusts, life insurance, powers of attorney, guardianship issues, and end-of-life health care directives. These documents and decisions affect the settlement of your estate as well as the financial interests of your heirs and should be reviewed with your attorney and accountant.
In addition, state tax law can vary from federal rules. An estate plan helps ensure that your family receives the maximum benefit from available credits, deductions, exemptions, and exclusions. Take time to review your plan under the current rules.