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The tax law contains two opportunities that let you combine the satisfaction of making gifts to those you love with strong tax advantages.
Gift-tax Annual Exclusion
Your first opportunity lets you give up to $13,000 each to any number of individuals each year -- without paying federal gift taxes. (This annual exclusion will be adjusted for inflation.) If you are married and your spouse joins you in making the gifts, the maximum value for each gift becomes $26,000. Your annual gifts can also reduce the estate tax that may be due when you die because neither your lifetime gifts themselves nor any later appreciation in their value will be part of your estate.
Here's one example of how the gift-tax annual exclusion works. Assume that you decide to give your daughter a gift of $13,000 worth of stock from your portfolio, and the stock gains $7,000 in value before you die. The entire $20,000 will escape estate tax.
If you continue making annual gifts over a period of years, it is possible to transfer a large part of your estate entirely without tax. Assume, for example, that your estate will have a net value of about $4.5 million, and you and your spouse begin making annual gifts to each of your six grandchildren. Each year you can reduce your future estate by $156,000 ($26,000 joint gift-tax annual exclusion times six). In just five years, your potential taxable estate will be $780,000 lower, 17% of its total, without any gift-tax liability.
Gift-tax Exemption
Your second opportunity to reduce tax by giving is the automatic exemption every individual receives from some federal gift tax by way of a lifetime exemption. You can use this exemption during your lifetime to lower your overall gift tax. The amount of assets effectively excluded from gift tax is $1 million.
Here's an example of how using the exemption while living reduces potential taxes. You may choose to give your adult child your portfolio of stock that's worth $1 million. If you have not made taxable gifts previously, your exemption will eliminate the gift tax on your gift, which will no longer be part of your estate. So, no estate tax will be due on this asset, not even if the stock appreciates in value by the time of your death.
You should consider use of the gift-tax exemption and an annual giving program only within the context of your entire financial and estate situation. Also, both strategies require expert tax assistance. Please ask us if you want to know more about establishing a gift program.
MFN-1009-8A5A
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
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