When you think about the estate tax, a logical solution would naturally come to your mind. You could simply give assets to your loved ones while you are living to avoid the tax.
Shortly after the estate tax was enacted, people did give gifts while they were living to sidestep the estate tax. However, a gift tax was enacted in 1924 to close this loophole. It was repealed in 1926, but it came back in 1932, and it has been in place since then. In 1976, the tax was unified with the federal estate tax.
Everyone does not pay the gift tax and/or the estate tax, because there are exclusions. One of them is the unified lifetime gift and estate tax exclusion. The amount of this exclusion is $5.43 million in 2015, but there are annual adjustments to account for inflation, so you could see a slightly larger figure next year.
Annual Gift Tax Exclusion
There is an annual gift tax exclusion that sits apart from the unified lifetime gift and estate tax exclusion. At the present time, the amount of this exclusion is $14,000. You could give as much as $14,000 to an unlimited number of gift recipients within a calendar year without facing any gift tax exposure.
If you wanted to give more than $14,000 to gift recipients tax-free within a calendar year, you could use a portion of your unified lifetime gift and estate tax exclusion to do so.
Taxpayers are allowed to pay medical bills for other people without incurring any gift tax liability, but the caregivers must be paid directly. You cannot give tax-free gifts to the patients with the understanding that they will use the money to pay the bills.
If you want to, you could also purchase health care insurance for the benefit of others, and the gift tax would not come into play.
The last exclusion that we will look at is the educational exclusion. You can pay school tuition for students free of the gift tax, but this is a tuition only exclusion. If you want to pay for books, fees, and living expenses, these would be taxable gifts. However, you could use your $14,000 annual exclusion to provide additional resources to students.
Transfers Between Spouses
We should point out the fact that there is an unlimited marital deduction. You can transfer unlimited assets to your spouse without incurring any transfer tax liability, as long as your spouse is a citizen of the United States.
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Our firm can help if you would like to discuss taxation with a licensed professional. We offer free consultations, and you can send us a message through this page to set up an appointment: Sacramento CA Estate Planning Attorneys.