The 2015 the estate-tax exemption has gone from the $5.34 million per person in 2014 to $5.43 million per person in 2015, due to an adjustment for inflation. Since 2012, couples the IRS recognizes as legally married can get the benefit of both of their individual exemptions (known as “portability”). So, in 2015, the total exemption per married couple will be nearly $10.86 million, if a surviving spouse files an estate tax return and tax advantage of this portability.
As a result, the estate planner’s focus has shifted:
Unlike years prior, the federal estate tax is no longer the biggest concern for most affluent Americans who want to avoid taxes on wealth they leave to heirs. According to the IRS, only about 3,700 estates, or 0.12% of the total, are expected to owe a federal estate tax this year. However, for that 0.12%, assets subject to the tax can be taxed up to the top estate tax rates of 40%.
As a result, estate planning attorneys have shifted focus, and rather than planning primarily to minimize estate taxes, we now create plans that minimize capital-gains and other income taxes. The new focus often contradicts our prior estate tax planning and advice. It may interest you to know that the current income tax rate for the highest income earning individual is currently 39.6%. As to future concerns, President Obama has proposed eliminating the “step-up” in basis that occurs at a property owner’s death, increasing the capital gains taxes that would be owed whenever the property is sold. At the 2015 State of the Union Address, we also expect to hear the President propose raising the capital gains rate to 28% (from the current rate of 20%). If successful in these proposals, the top capital gains rate would be applied to inherited properties over and above the estate tax rate of 40% (mentioned above).
Anyone who thinks they don’t need tax planning anymore because they are under the estate tax exemption amount should consider reviewing their estate with an attorney and a tax professional to discuss potential capital gains and income tax issues of which they may not be aware.
Annual gifting exclusion remains steady.
The “annual gift exclusion” will remain at $14,000 per recipient in 2015. This is the amount that a taxpayer can give to an individual, tax-free, each year. There is no limit on the number of such gifts a taxpayer can make, as long as each is to a different person or an entity for the benefit of a person. Married couples can combine their gifts to give $28,000 per recipient. Anything above these amounts would have to be reported to the IRS.
It is also important to remember that gifts/transfers between spouses are often tax-free.
Review your plan with an attorney to possibly simplify and reduce tax concerns.
If your estate planning has not been reviewed in several years, it is a good time for a “check-up.” Very often your planning can be simplified with these new, higher estate tax limits, but it’s important to plan around the new and challenging income and capital gains tax issues.