Gift and Estate Taxes Untangled
This time I want to shed some sunlight on how gift and estate taxes work. I spend a lot of time dispelling rumors about them that have persisted since Warren Buffet made his first billion, so let's try to clear up some misconceptions.
The first thing to keep in mind is that we're talking only about federal taxes here. New Hampshire has no gift or estate taxes at all, even if you really are Buffet-rich. This State gets you in other ways, particularly if you own real estate, but it leaves gift and estate taxation to the feds.
And the thing to remember about federal gift and estate taxes is that they're closely intertwined. The way it works is that each of us currently has an "exemption" of $11,400,000 for lifetime gifts and/or date-of-death-transfers that can pass totally tax-free - that number's not a typo. So a married couple actually has $22,800,000 to work with. That may be just a drop in the buffet for Warren, but it will keep most of us from having to worry much about even federal taxes.
As if that wasn't enough, there's also the annual gift tax "exclusion" that allows each of us to make a yearly gift of up to $15,000 in value to each and every other person we choose, totally without tax consequences of any kind. And if we're married, we can double up on those exclusions, even if only one of us actually makes the gift.
So let's put all this together to see how the taxes dovetail. Let's say we make a gift of $50,000 to one of our children this year. That qualifies for the $15,000 annual exclusion and because we're married, we can count $30,000 as qualifying for it. The remaining $20,000 is then deducted from our lifetime exemption of $11,400,000, so there's no tax due, but now we're all the way down to $11,380,000 to apply to other gifts during lifetime - or to use against the value of our assets at death.
Then, if we die having $1,000,000 of estate assets and having made no other lifetime gifts above the annual exclusions, our estates will use up another $1,000,000 of our exemption and there will be $10,380,000 left that can be added to the exemption amount our spouse will have available at his/her death.
One caveat, though, is that if an annual gift exceeds the exclusion amount, we do have to file a gift tax return - not because there's any tax due but because the IRS wants to keep track of the amount of lifetime exemption we've used up.
And there's still one more goody. If we contribute to our children's or grandchildren's school tuitions or uninsured medical expenses (or anyone else's, for that matter), those payments, whatever the amounts, don't even count toward our annual exclusion gifts. We just have to be sure to make the payments directly to the school or medical provider.
Oh, sure, there are a few twists and turns about what I've said - after all, the tax code makes the Manhattan phone book look like a pamphlet - but if you've hung in here this long, you've got the big picture. The main takeaway is that most of us can be as generous with our needy children and grandchildren as we can afford to be, even if that benevolence far exceeds the annual $15,000 exclusions.
posted 02/28/2019
The first thing to keep in mind is that we're talking only about federal taxes here. New Hampshire has no gift or estate taxes at all, even if you really are Buffet-rich. This State gets you in other ways, particularly if you own real estate, but it leaves gift and estate taxation to the feds.
And the thing to remember about federal gift and estate taxes is that they're closely intertwined. The way it works is that each of us currently has an "exemption" of $11,400,000 for lifetime gifts and/or date-of-death-transfers that can pass totally tax-free - that number's not a typo. So a married couple actually has $22,800,000 to work with. That may be just a drop in the buffet for Warren, but it will keep most of us from having to worry much about even federal taxes.
As if that wasn't enough, there's also the annual gift tax "exclusion" that allows each of us to make a yearly gift of up to $15,000 in value to each and every other person we choose, totally without tax consequences of any kind. And if we're married, we can double up on those exclusions, even if only one of us actually makes the gift.
So let's put all this together to see how the taxes dovetail. Let's say we make a gift of $50,000 to one of our children this year. That qualifies for the $15,000 annual exclusion and because we're married, we can count $30,000 as qualifying for it. The remaining $20,000 is then deducted from our lifetime exemption of $11,400,000, so there's no tax due, but now we're all the way down to $11,380,000 to apply to other gifts during lifetime - or to use against the value of our assets at death.
Then, if we die having $1,000,000 of estate assets and having made no other lifetime gifts above the annual exclusions, our estates will use up another $1,000,000 of our exemption and there will be $10,380,000 left that can be added to the exemption amount our spouse will have available at his/her death.
One caveat, though, is that if an annual gift exceeds the exclusion amount, we do have to file a gift tax return - not because there's any tax due but because the IRS wants to keep track of the amount of lifetime exemption we've used up.
And there's still one more goody. If we contribute to our children's or grandchildren's school tuitions or uninsured medical expenses (or anyone else's, for that matter), those payments, whatever the amounts, don't even count toward our annual exclusion gifts. We just have to be sure to make the payments directly to the school or medical provider.
Oh, sure, there are a few twists and turns about what I've said - after all, the tax code makes the Manhattan phone book look like a pamphlet - but if you've hung in here this long, you've got the big picture. The main takeaway is that most of us can be as generous with our needy children and grandchildren as we can afford to be, even if that benevolence far exceeds the annual $15,000 exclusions.
posted 02/28/2019