November 15, 2017
What are the tax advantages of gifting?
You may enjoy significant income tax and estate tax savings with a properly structured gifting program. To understand the tax advantages of making lifetime gifts, you must understand what constitutes a gift and how it is taxed.
Generally, a gift is not taxable income to the donee (the recipient). However, any income earned by the gift property, or any capital gain on its subsequent sale, is generally taxable to the donee. You, the donor, may be responsible for paying state and/or federal transfer taxes imposed on gifts you make. There are four transfer taxes that may affect your gift giving: (1) state gift tax, (2) state generation-skipping transfer tax, (3) federal gift and estate tax, and (4) federal generation-skipping transfer (GST) tax.
Eliminate future appreciation from your estate
One of the most common reasons for gifting is to remove an appreciating asset from your estate. An appreciating asset is one that is increasing in value over time. Removing the asset today keeps any appreciated value out of your estate later. The amount that may be subject to gift and estate tax will likely be less today than it will be in the future.
For example, Darcy purchased some real estate for $150,000. Five years later, the property is worth $300,000, and she expects that it will double in value during the next five years. Darcy wants to give the property to her daughter, Ellen. If Darcy wants to save gift and estate taxes, she should make the gift now instead of later. Now, only the $300,000 will be subject to tax, and in five years $600,000 will be subject to tax.
Tip: Property that is likely to grow in value includes the cash value of life insurance, common stock, antiques, art, and real estate.
Take advantage of qualified transfers
Qualified transfers are specific types of gifts you can make that are exempt from the federal GST tax. A qualified transfer is any amount you pay on behalf of someone else, either as tuition to an educational institution or to pay medical expenses to a medical care provider. This is a great way to help your children or grandchildren through college or to help your elderly parents get the proper medical care they deserve.
Take advantage of the annual gift tax exclusion
The annual gift tax exclusion is a federal exclusion that allows you to give $14,000 (in 2014 and 2015) per donee to an unlimited number of donees without incurring federal gift and estate tax or federal GST tax. This exclusion allows you to distribute your property tax free and potentially put your estate into a lower tax bracket. The exclusion applies only to gifts of a present interest in property. For example, giving your niece cash today would qualify, but giving her the right to have your house in three years would not. Only certain transfers in trust qualify, and the rules are slightly different for gift and estate tax and GST tax purposes.
Tip: If you are married, gift splitting can double the annual gift and estate tax and GST tax purposes.
Take advantage of the gift and estate tax applicable exclusion amount and the GST tax exemption
The federal gift and estate tax applicable exclusion amount is used to offset cumulative lifetime gifts and estates. The federal GST tax exemption works like the applicable exclusion amount for transfers made to skip persons (family individuals who are more than one generation below you and certain trusts for the benefit of such individuals). You may want to use the applicable exclusion amount and the GST tax exemption during your lifetime instead of waiting until your death because of the time value of money - money is worth more today than it will be tomorrow.
Some states may have the equivalent of the federal gift and estate tax applicable exclusion amount and GST tax exemption.
Potentially reduce state death taxes
State death taxes are generally imposed on property you own at the time of your death. Removing property from your estate during life can minimize state death taxes.
Shift income to a lower income tax bracket
Because the income tax rate schedules are graduated, your total family federal and state income tax burden may be reduced if income-producing assets are distributed among several family members rather than being held in your hands only.
Shift capital gains to a lower income tax bracket
Federal and state capital gains tax on the sale of appreciated property may be reduced by transferring the property to someone who is in a lower income tax bracket or who has losses to offset the gain.
Remove certain assets in order to qualify for special tax assessment
You may receive special estate tax treatment if your estate meets certain percentage tests (a certain percentage of your estate consists of specific types of assets). Removing certain nonbusiness holdings may help your estate meet these tests and so qualify for Section 303 (redemption of stock), Section 2032A (special use valuation), or Section 6166 (installment payout of taxes) tax treatment.
Remove tax paid on lifetime gifts from your taxable estate
Although the tax you pay on lifetime gifts is tax exclusive, the tax paid on gift-at-death transfers is tax inclusive. This means that funds used to pay tax on gift-at-death transfers may be includable in your estate for estate tax purposes, while funds used to pay tax on lifetime gifts are not. You can save tax overall by making lifetime gifts, because the amount of the tax you pay on those fits is removed from your estate.
IMPORTANT DISCLOSURES This information has been prepared by Broadridge Investor Communication Solutions, Inc. Minis & Company does not endorse the content provided, it is to be viewed for informational purposes only. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
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