2016 Estate And Gift Tax Limits: The $10.9 Million Tax Break
Posted by Christian Wynns on June 13th, 2016
For 2016, the estate and gift tax exemption is $5.45 million per individual, up from $5.43 million in 2015. That means an individual can leave $5.45 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield $10.9 million from federal estate and gift taxes. The annual gift exclusion remains the same at $14,000. The top federal estate tax rate is 40%.
What’s next for the estate tax? Democrats are calling for a $3.5 million exemption and a 45% top estate tax rate. Meanwhile Republican candidates are toeing the party line for repeal. In April, the House voted to kill the estate tax 240-179, with 7 Democrats joining. The Senate may vote on its own bill but any real chance of repeal would come in 2017 after the Presidential election.
The federal 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.
Don’t let the $10.9 million number fool you. The rules for couples are tricky. A husband and wife can each get their own exemption, but it’s not automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. But to use your late spouse’s unused exemption – a move called “portability”—you have to elect it on the estate tax return of the first spouse to die, even when no tax is due. The problem is if you don’t know what portability is and how to elect it, you could be hit with a surprise federal estate tax bill.
Totally separate from the lifetime gift exemption amount is the annual gift tax exclusion amount – $14,000 for 2016. 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.
When you’re making gifts to children and grandchildren, keep in mind that there’s a federal kiddie tax that covers students through the age of 23 and puts investment income, above small amounts, into the parents’ tax bracket. For 2016, the kid pays no tax on the first $1,050 of unearned income and then a 10% rate on the next $1,050.
See your local tax advisor for more information.
Source: Ashlea Ebeling, Forbes
