You can transfer unlimited assets to your spouse tax-free, but anything that you want to transfer to others is potentially subject to the death tax. The federal estate tax exclusion is the amount that you can transfer tax-free.
The exclusion has changed a great deal over the years. Back in 2009, the federal estate tax exclusion was $3.5 million, and the maximum rate was 45 percent. Due to a provision contained within the Bush era tax cuts, the estate tax was repealed for the 2010 calendar year.
Throughout 2010, the estate tax was scheduled to return in 2011 with a $1 million exclusion. However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 set the exclusion at $5 million for 2011.
The top rate of the tax went down to 40 percent.
This act remained in effect through 2012. There was an inflation adjustment for 2012 that set the exclusion at $5.12 million.
At the end of 2012, another tax relief act was passed. This legislative measure is called the American Taxpayer Relief Act of 2012. Provisions contained within this act maintained the $5 million base exclusion that was put into place for 2011, and the provisions allowed for ongoing adjustments to account for inflation.
In 2013, the exclusion was $5.25 million, and throughout 2014, the exclusion has been $5.34 million.
Since we are approaching a new year, the Internal Revenue Service has announced another inflation adjustments that will be applied in 2015. The 2015 federal estate tax exclusion is going to be $5.43 million.
Federal Gift Tax
When the estate tax was first enacted in 1916, there was no gift tax. As a result, people would give gifts to their loved ones while they were living in an effort to avoid the estate tax. To close this loophole, a gift tax was installed, and it was unified with the estate tax in 1976.
Because the two taxes are unified, the $5.43 million exclusion that will be in place in 2015 is a unified lifetime exclusion. It encompasses large gifts that you give while you are living along with the estate that you are passing on to your heirs.
Annual Gift Tax Exclusion
In addition to the unified lifetime gift and estate tax exclusion, there is also an annual per person gift tax exclusion. The amount of this exclusion has been $14,000 in 2014. You can give up to $14,000 to any number of people tax-free.
If you give a gift to someone that exceeds $14,000, you would be using a portion of your unified lifetime exclusion to give the gift in a tax-free manner.
The amount of the annual gift tax exclusion is sometimes increased to account for inflation, but it appears as though the $14,000 figure will remain in place in 2015.
If you have questions about taxation, we can provide answers. We offer free consultations, and you can send us a message through this link to set up an appointment: Indianapolis IN Estate Planning Attorneys.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.