James F. McDonough
November 24, 2014
What do the 2015 Estate Tax Exemptions have to offer?
The federal exemption to the estate tax
is the amount that, above which, estates must pay federal estate taxes. Last year, it was raised from $1 million to $5.34 million and indexed for inflation in order to stay in line with the rising cost of living. This change came in response to critics of the tax, who argued that a middle class family might easily accumulate $1 million in combined wealth and home equity over a lifetime due to the new 2015 estate tax exemptions.
As a result of the exemptions being indexed for inflation, the rate will now increase to $5.43 million
in 2015, the IRS announced recently, according to The Wall Street Journal.
Only about 3,700 estates – about 0.12 percent of all U.S. estates – are expected to owe federal estate tax in 2014, the news source explained. In part, this is because married couples can claim two individual exemptions, bringing the total to almost $11 million. Even after this, there are a number of techniques that can be employed in order to minimize an estate before death, thus minimizing the total tax liability. Even so, those who do incur a liability under this tax must pay a high rate – 40 percent – on amounts above the exemption.
Gift tax limits
The IRS also announced gift tax limits
as one of the 2015 estate tax exemptions, according to Forbes. This is the amount that can be given away to a single recipient tax-free per year. In 2015, the annual gift tax exemption will be $14,000, the same as it is this year.
While $14,000 may not seem like a lot compared to the exemption on the estate tax, it can be given away every year to as many individuals as the owner likes. A husband and wife can also both give gifts individually, effectively doubling this amount for married couples.
This means that a wealthy husband and wife with five beneficiaries could gift each of those beneficiaries $14,000 per year. That’s $70,000 from the husband and $70,000 from the wife to make $140,000. Over several years, this is an extremely effective way to whittle down an estate.
Forbes also mentioned other ways around the 2015 estate tax exemptions. Gifts toward medical, dental and tuition expenses don’t count toward the gift exemption if the provider is paid directly. Another tactic is to fund a 529 college savings plan for a child or grandchild. Five years of the annual exclusion can be put into one of these plans at once, coming to a total of $70,000 per year in 2015.