The dividing line that separates which estates are subject to estate tax and which estates are not is the federal estate and gift tax exclusions – sometimes referred to as the “unified credit.” They entitle you to a total lifetime exclusion of $5.34 million, as of 2014. This means that $5.25 million of your estate will be exempt from inheritance taxes when you die. A great benefit of the unified credit is that it is “portable,” which means that if you do not use the total amount, the remainder of the credit will pass to your spouse when you die.
The gift tax and estate tax exclusions are sometimes called the unified credit. The unified credit is “portable,” which means that if you do not use the full amount, the remainder of the credit will pass to your spouse when you die. With the exemption amount in 2014 at $5.34 million, very few taxpayers have to worry about estate tax. It has not always been this way, however. In 1997, the estate tax exemption was merely $600,000. In 2008, the exemption had only risen to $2,000,000.
What is the gift tax exclusion?
Whenever you transfer ownership of property, the IRS imposes a gift tax. All gifts are taxable, with some exceptions. For instance, tuition or medical expenses you pay for someone, and gifts to spouses, political organization and qualified charities are not taxable. The Annual Gift Tax Exclusion for 2014 is $14,000 per recipient. If both you and your spouse give a gift jointly, then you are each entitled to the annual exclusion amount of the gift. This means the total exemption for a joint gift is $28,000.
Do I have to pay tax on my estate over $5.34 million?
Not necessarily. If your estate is valued at more than $5.34 million, you can still reduce or eliminate your estate tax liability through careful estate planning. In fact, most wealthy estates are required to pay much less than 40% to the federal government. The easiest way to avoid estate tax is through gifts. However, you can also reduce your potential estate tax by making use of trusts, charitable trusts, and life insurance policies.
What happens if I exceed the annual exclusion?
If you exceed the $5.34 million lifetime exclusion amount, then you will be required to pay 40% on gifts that exceed that amount. There is one exception – the marital deduction. Under federal tax laws, married couples can give a gift of an unlimited amount to their spouse. This provides a way for married couples to transfer their property to each other, while avoiding federal estate or gift taxes. When the spouse giving the property passes away, the value of the property that passes to the surviving spouse is deducted from the deceased spouse’s gross estate. The amount of this deduction is unlimited, but there are some requirements that must be met. Consulting with an estate planning attorney will help you to determine the best way to reduce your estate taxes.