When you hear about the existence of the federal estate tax, you may assume that you can simply give gifts to avoid this death tax. While this makes sense on the surface, the powers that be decided to close that loophole many years ago through the enactment of the gift tax. The gift tax and the estate tax are unified under the tax code.
Gift Tax Exemptions
There are some gift tax exemptions that can be used to give tax-free gifts. The exemptions are called exclusions in formal tax lingo.
First off, you should be aware of the unlimited marital deduction. You can transfer unlimited assets to your spouse free of the gift tax, and this extends to the estate tax as well. This is assuming your spouse is an American citizen. The unlimited marital deduction is not available to non-citizen spouses.
We have a $14,000 per person, per year gift tax exclusion. This allows you to give as much as $14,000 within a calendar year to an unlimited number of gift recipients free of taxation.
In addition to this $14,000 per person annual exclusion, there is also a unified gift and estate tax exclusion. In 2015, this exclusion stands at $5.43 million. If you were to give a gift to someone that exceeded $14,000 in a given calendar year, you could give the gift tax-free using a portion of this unlimited unified exclusion.
However, if you use all of this $5.43 million unified exclusion giving gifts while you are living, there would be nothing left to apply to your estate, and your entire estate would potentially be subject to the estate tax.
Educational and Medical Exclusions
There are two additional gift tax exclusions that we should touch upon here. You are allowed to use the educational exclusion to pay school tuition for students without incurring any gift tax liability. This is a tuition-only exclusion. It does not extend to books, fees, and living expenses.
The school must be paid directly if you want to use this exclusion. You cannot give the money to the student with the understanding that he or she will pay the tuition.
The medical exclusion allows you to pay health care expenses for others free of the gift tax. This includes health insurance. You could purchase health insurance to benefit others, and there would be no gift tax responsibilities.
Schedule a Free Consultation
The various taxes that can come into play when you are planning your estate can be complicated and confusing. If you would like to discuss everything in detail with a licensed professional, our firm can help.
We offer free consultations, and you can send us a message through our contact page to set up an appointment: Smithtown NY Estate Planning Attorneys.
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