Death and Taxes, Of This We Can Be Sure: What you need to know about tax planning

Most people only know about the income taxes that they pay each year on the income that they earn. They either use the standard deduction or deduct actual deductible expenses. This income tax system is confusing and hard to understand what you need to know, as it is fraught with items that have been set up for special interests. For instance, the real estate tax deduction and the mortgage interest deduction were set up to promote home ownership. The Internal Revenue Code started in 1913 as a simple system and has morphed into more than 77,000 pages of the law, code and regulations!

What if you make a gift to one of your kids? Do you get an income tax deduction for that gift on your income tax return? After all, some people say that charity starts at home. The reality is that your child does not have to include the gift in income for income tax purposes, nor do you get a deduction on your income taxes. Gifts are covered under a different system.

There is a combined federal gift and estate tax system that controls personal gifts. If you make that gift to a child, you may need to file a gift tax return for that tax year. This federal gift tax system allows you an annual exemption amount of $15,000 per donee. If you are married, your spouse can “join” in the gift and take another $15,000 per donee. This allows you up to $30,000 per donee per year, without using up any portion of a lifetime exemption that the law allows.

The current federal lifetime exemption is set at $11.7 million per person. This amount was part of legislation that “sunsets” (goes away, just like the sunset does) at the end of 2025. At that point, if Congress does nothing to extend this amount or to change it, it will revert back to what it was before–$5.4 million per person. So that you better understand the importance of the lifetime exemption, every dollar above the exemption may be taxed at a 41% rate or higher.

As you can tell, the amounts of the annual exclusion and the lifetime exemption change from time to time, depending on the whims of the Congress at that time and who is President. The federal estate tax system has never been popular with citizens of the United States, as it is a tax at death on everything that was saved by that person, AFTER paying income taxes over the years. It has in the past led to having to have family businesses or farms or ranches sold in order to pay taxes. This was one of the reasons that the tax law increased the lifetime exemption several years ago.

Depending on what state you live in, there may also be a separate state estate tax. There are states that have no estate tax system, so many people will move to those states as they retire. For instance, in Illinois, the law gives a person a $4 million exemption at death. Every dollar above that exemption gets taxed at a 16% rate.

There are some assets that most people use that are subject to both income taxes and federal estate taxes and state estate taxes. These are qualified plans, such as IRA’s, 401(k)’s and annuities. These assets are part of your federal estate tax and state estate taxes AND the beneficiary of these items pay a tax on the money when it comes out of the plan.

That is why they say that there are just a couple of certainties—death and taxes!

It is best to have a qualified person such as a CPA or attorney with this skillset look into your personal situation and make recommendations on how best to protect your assets whether as an individual or as a business. There are many ways you can protect your finances and incur the least tax burden as possible.

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Denice Gierach

Gierach Law Firm

Denice Gierach is an attorney, CPA, Northwestern University business master's graduate, and has owned several businesses from real estate to manufacturing. She is the lead attorney at Gierach Law Firm in the Chicago area. With more than 30 years of experience, she has been a respected and sought-after resource for businesses looking to grow, sell, solve problems, and succeed long term. Her insights across business areas gives a fuller lens to business issues and solutions, and helps businesses grow and succeed with less time spent on legal issues and other time-consuming problems.

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