TJT Client Advisory Services

Year End Estate Tax Planning

In 2013, the annual gift tax exclusion increased from $13,000 to $14,000. That is, each individual can give up to $14,000 worth of assets to any number of recipients with no tax consequences. (Married couples can give up to $28,000 per recipient.) Example 1: Marjorie Palmer gives $14,000 to her son Nick, $14,000 to her daughter Olivia, and $10,000 to her friend Paula, whose home was severely damaged in a storm. Marjorie does not have to file a gift tax return, and she will not lose any of her lifetime gift tax exemption or her estate tax exemption. In this example, Marjorie’s net worth is between $2 million and $3 million. She does not expect to owe federal estate tax, because the exemption is $5.25 million in 2013 and likely to increase in the future. However, Marjorie lives in a state where the estate tax exemption is $1 million. Thus, these gifts will trim her estate’s eventual exposure to state estate tax. People with much larger estates also should consider making gifts up to $14,000 by year-end to reduce future federal and possibly state estate tax. If you don’t make the gift in 2013, you can’t double up in 2014. That is, Marjorie can’t give $28,000 to Nick in 2014 and spread that gift over 2013 and 2014 for gift tax purposes.

 Income tax tactics

As federal estate tax concerns fade for most people, income taxes are rising for high bracket individuals and couples. Even if you are not concerned with state or federal estate tax, using the annual gift tax exclusion may help to reduce your income tax bill. Example 2: Len and Karen Young have taxable income over $450,000 a year. Therefore, they owe a 20% tax on income from qualified dividends and a 3.8% Medicare surtax. Len gives $14,000 worth of dividend paying stocks to their daughter, Jill, who is a 25-year old graduate student with little income; Karen makes similar gifts. In January 2014, the senior Youngs repeat those gifts. Altogether, Len and Karen transfer $56,000 of dividend paying stocks to Jill, who will owe 0% tax on those dividends as long as her income is low. Similarly, high bracket taxpayers might use the annual gift tax exclusion to transfer assets before a planned sale. Example 3: Suppose that Len and Karen also have a son, Greg, who is buying a condo. The senior Youngs hold $100,000 worth of appreciated mutual funds they plan to sell at a long-term gain, fearing a correction, and they would like to help Greg buy the home. Len and Karen could transfer $50,000 worth of the shares to Greg in December 2013 and another $50,000 worth of shares in January 2014. Each year, the couple’s annual gift tax exclusions would cover $28,000 of the $50,000 gift, reducing the amount they would report on a gift tax return and reducing the impact on their gift and estate tax exemptions. In this example, Greg could sell the appreciated shares and report the capital gain. Depending on the amount of the gain and Greg’s taxable income, he might owe 0% on the sale. Even if Greg does not qualify for the 0% rate, he probably would owe 15% on the gain, less than his parents would owe in this example. Thus, gifts of dividend paying stocks and appreciated assets can save income tax, especially if the gifts are to young adults or to retired parents with modest income. However, gifts to youngsters, including full-time students under age 24, may trigger the “kiddie tax”; in 2013, unearned income over $2,000 is taxed at the parent’s rate, if reported by a socalled “kiddie.” The kiddie-tax rules are complex, but our office can help you execute tax-efficient gifts to children and grandchildren.

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