I spend a lot of time passing on tips for income tax savings but have not recently paid enough attention to helping save estate taxes. Simply stated, the government gets you twice–once while you are earning (income taxes) and again after you have passed away (estate taxes).
This hardly seems fair; but when I speak to clients about saving estate taxes, too many of them say they don’t care what happens after they are no longer here. My response is usually to go through a list of family, friends and charitable organizations and then at the bottom of the list I add the IRS. I then tell them that the only thing I have in the right order is the IRS, and I know they do not want them to have what they have spent their whole life accumulating and which has already been taxed.
Without proper planning, the money goes to the IRS–just ask the estates of John D. Rockefeller and Elvis Presley.
Tip #1 – Make sure to use your gift tax exclusion. This year, you can give up to $14,000 to a child, grandkid or other person without gift tax consequences. If you are married, your spouse also can give $14,000 to the donee, doubling the tax-free amount to $28,000. The exclusion is going to remain $14,000 next year too. If you don’t use up the full exclusion amount this year, any shortfall is lost forever. The unused amount cannot be carried over to 2016.
Annual exclusion gifts help save estate taxes too. The amount of these gifts aren’t added back to your estate, and future appreciation on them is out of your estate.
Tip #2 – Direct tuition payments for students get two breaks. They don’t count against the $14,000 gift tax exclusion, and they reduce the size of your taxable estate.
The same rule applies for direct payments of a person’s medical expenses.
Tip #3 – Payments to 529 plans to help your kids or grandkids with college. You can put in as much as $70,000 per child free of gift tax this year; $140,000 if your spouse agrees. In most cases, the payins are out of your estate. Withdrawals are tax-free if used to pay for tuition, fees or books, plus room and board if the student is pursuing at least half the normal course load. But giving the maximum will wipe out your 2015 and 2016 gift tax exclusion and most of it for 2017-2019 too.
Larger gifts are slightly less tax-favored. You will not owe any gift tax on gifts over $14,000 as long as you haven’t used up your $5.43 million estate tax exemption. And any future rise in the value of the assets you give away isn’t part of your estate. But the amount by which a gift exceeds $14,000 is added back to your taxable estate.
Tip #4 – Turbocharge your donations to charity by giving away appreciated assets such as stocks. The appreciation escapes capital gains tax, and you get a deduction for the full value in most cases, as long as you’ve owned the asset for more than a year. But remember, deductions for donations are reduced when adjusted gross income tops $258,250 for singles, $284,050 for household heads and $309,900 for marrieds.
Don’t donate an asset that has declined in value. If you do, the capital loss is wasted. You are better off tax wise selling the asset and donating the proceeds. The same goes if you plan to make a gift to a person. If you give the donee an asset that has lost value, he or she can’t turn around and sell the asset and deduct the loss.
Tip #5 – Consider a charitable lead annuity trust. It pays an annuity to charity for a set term, after which what’s left goes to the donor or other beneficiaries. Although interest rates have ticked up, the donor still gets a nice up-front write-off. That deduction can be used to offset income generated from a Roth IRA conversion, for example, letting the donor enjoy a lifetime of tax-free withdrawals from the Roth.
Review your gift giving plans now while there is still plenty of time to act. Don’t wait until the last minute to take advantage of tax breaks that can reduce your estate and income tax bills.
Adopted From The Kiplinger Tax Letter 7/17/15