Welcome to Part 6 of the ol’ blog’s series on 2017 inflation adjustments. You can find links to all 2017 inflation posts in the series’ first item: Income Tax Brackets and Rates. Today we look at changes to estate and gift tax amounts, as well as limits on investment income for children, known as the kiddie tax.Note: The 2017 figures apply to 2017 returns that are due in 2018. For comparison purposes, you’ll also find 2016 amounts to be usedin filing 2016 returns due next April.
There’s a time for play and a time for generational tax planning. (Photo by Ryan Ruppe via Flickr.)
If you have assets worth more than $5 million, then you’ll want to check out the Internal Revenue Service’s 2017 figures as they relate to the federal estate and gift taxes.
Estate tax exclusion: Often referred to as the death tax, the officially named estate tax lets Uncle Sam take a portion of what you leave when you finally leave this existence.
Just how much of a cut the federal government gets depends on just how much you leave your heirs. If your final assets are less than a certain amount that annually adjusted for inflation, then there’s no estate tax issue.
For the 2017 tax year, if you die and leave assets of more than $5.49 million, the amount over that exclusion figure could be subject to federal tax of 40 percent.
The estate tax exclusion amount next year is a slight increase over the 2016 amount of $5.45 million on estates left in 2016.
And the exclusion amount applies to each person individually. So a married couple will be able to leave $10.98 million to heirs and not pay any federal estate tax.
Tax-free gifts: In addition to the estate tax exclusion, wealthy individuals also have the option to take advantage of tax-free gifts before they die to help keep their total assets below the estate tax limit.
This is a valuable option for two reasons.
First, it can help reduce your estate to keep it under the level where the estate tax kicks in.
Second, and even better, you’ll be around to get “thank yous” from your gift recipients.
As with the estate tax exclusion, the gift tax exemption amount is adjusted each year for inflation. In 2016 and 2017, the gift tax limit is $14,000.
You can give up to the gift tax limit either in cash or an asset valued at the amount to as many people, not just relatives, as you wish.
And the gift exemption amount, like the estate tax exclusion, applies per person, meaning spouses each can make $14,000 gifts. So a couple combined could give a child a total of $28,000 without any tax consequence.
Lifetime gift exemption: As long as you stay at or under the annual gift tax exclusion amount, the gifts will not count toward another limit, the lifetime gift exemption.
As the name indicates, the lifetime gift exemption is the total amount of gifts that can be given away tax-free by a person over his or her lifetime to any number of people.
This limit is necessary because without it, rich folks could simply give away the bulk of their money or property while living to avoid estate taxes after death.
But the lifetime gift exemption amount is pretty generous. It’s the same as the estate tax exclusion, or $5.49 million in 2017 and $5.45 million in 2016.
If, however, you happen to go over the lifetime gift exclusion, you will owe a 40 percent tax on the gifts exceeding the lifetime exclusion amount.
Kiddie tax: Although not specifically tied to estate taxes, young children are often recipients of financial gifts. Parents and grandparents give minor children investment assets as ways to provide support for future goals and teach the kids about money management.
However, successful investments could carry a tax cost for young people.
The so-called kiddie tax comes into play when young people (up to age 23 if a full-time student) have unearned income that exceed limits that are set annually based on inflation.
When a young person has investment income, the first $1,050 of unearned income is not taxable. But the next $1,050 is taxes at the child’s tax rate, typically the lowest 10 percent rate.
And for both tax years 2016 and 2017, when a child’s investment earnings top $2,100 (that’s the untaxed $1,050 and the next $1,050 taxed at the child’s rate), the excess unearned income is taxed at the parents’ tax rate.
Whether you’re planning eventual resolution of your estate or simply focusing now on a youngster’s investment income, be sure to keep an eye on the inflation changes. They could affect your asset and tax decisions.
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2017 limits on estate, gift and kiddie taxes