US Tax Code Information

elderly couple enjoying federal estate tax exemptionIn the U.S. tax code, there is a special provision regarding monetary gifts, and how much you can gift to someone without having to pay taxes. According to the Internal Revenue Service (IRS), “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return is considered a gift. The IRS states that while the donor is generally responsible for paying taxes on the gift, in some cases (if special legal arrangements are made, through the counsel of a qualified estate planning attorney) the recipient of the gift can opt to pay taxes on it instead. “The general rule,” reports the IRS, “is that any gift is a taxable gift. However there are many exceptions to this rule.” According to the IRS, gifts that are tax exempt include:

  • Gifts that do no exceed the annual exclusion in a single calendar year
  • Tuition or medical expenses
  • Gifts to a spouse
  • Gifts to a political organization

In the beginning of 2013, the federal estate tax exemption—“the amount you may leave to heirs free of federal tax,” reports CNN Money —was increased to $5.25 million. Unless you exceed this amount, any gift that you give to your heirs will not be taxable, which is why many opt to reduce their estate by gifting small amounts of money to their heirs while they are still alive. “Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax,” reports the IRS.

Inheritances over $5.25 million are taxed heavily, at 40 percent. When the new limits took effect, many farmers were understandably incensed. According to the U.S. Department of Agriculture Economic Research Service, “the federal estate tax has applied to the transfer of property at death since 1916, as part of a unified system of transfer taxes.” This means that if a farmer owns land worth more than $5.25 million and passes it down to his children, he is responsible for paying the gift tax on it—even though his liquid assets had not changed.

If you or someone you know is beginning to consider how to reduce your estate or are interested in figuring out how best to gift your assets, seek the counsel of an experienced estate-planning attorney. Contact The Gierach Law Firm today.