Federal Gift Tax for 2013 and 2014

The federal gift tax applies to the transfer of any kind of property (including money) from one individual to another, and also sales or exchanges not made in the ordinary course of business where the value of money or property received is less than the value of what is sold or exchanged. According to the instructions for IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, the gift tax may also apply to forgiving a debt, to making an interest-free or below market interest rate loan, to transferring the benefits of an insurance policy, to certain property settlement in divorce cases, and to giving up of some amount of annuity in exchange for the creation of a survivor annuity.

Gift and Estate tax exclusions

In 2012, many individualsrushed to make large gifts before January 1, 2013, because the $5,120,000 million dollar gift and estate tax exclusion was expected to expire and the previous lower $1 million dollar exclusion was scheduled to return, with the tax on transfers above that amount expected to rise from 35% to up to 55%.As part of the American Taxpayer Relief Act of 2012 (ATRA), Congress finally passed permanent gift and estate tax reform.

The ATRA increased the top tax rate for gifts and generation-skipping transfers to 40% for 2013 transfers. The applicable gift and estate tax exclusion amount is $5,250,000, which is indexed for inflation, for gifts made in 2013. This exclusion is expected to increase to $5,340,000 in 2014. In the case of a surviving spouse, an additional amount can be added to the basic $5,250,000 exclusion amount if there is an unused exclusion amount of a predeceased spouse who died after December 31, 2010. To take advantage of this rule, the executor of the deceased spouse’s estate must complete IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, within a set period of time in order for the surviving spouse to utilize the unused exclusion amount (also referred to as “portability”).

Annual exclusions

The ATRA included a $14,000 annual exclusion for gifts made in 2013 and 2014, which increased from $13,000 in 2012. This exclusion allows a single person to gift $14,000 to an unlimited number of donees. Spouses can also combine their gift tax exclusions and give a total of $28,000 to each of their recipients. Gifts at these levels are not subject to gift tax and do not need to be reported to the IRS.The annual exclusion increased to $143,000 for gifts given to non-US citizen spouses.

With regards to gift and estate planning, maximizing each year’s annual gift tax exclusion should continue as a primary traditional tax strategy. The annual exclusion cannot be transferred and added to next year’s exclusion.If it is not used in a current year, it is lost and cannot be used in future years.

There are several types of support payments that are not counted toward the annual gift tax exclusion. They include tuition payments for higher education paid directly to the educational institution and payments made for many medical services made directly to the medical provider.

Another interesting tax advantage to note relates to 529 educational savings plans. Under a special rule for 529 plans, up to $70, 000 for a single person and $140,000 for married couples can be gifted at one time by accelerating five years’ worth of gifts into one year. Parents, grandparents, aunts, uncles, etc. are all able to make donations to a child’s 529 plan. The donor will not be subject to federal gift taxes as long as no additional gifts are made to the same donee for four years after the one time gift was given.To take advantage of this special rule, an election must be made on a gift tax return filed for the year of the gift.

Same-sex couples

The 2013 Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, instructions regarding different rules applicable to spouses do not mention the fact that legal same-sex marriages are now recognized by the federal government. Same-sex married couples can take full advantage of gift splitting and other federal tax rules that apply to lawfully married couples even though they currently live in a state that does not recognize same-sex marriages.

Conclusion

There are many changes related to gift and estate taxes that families should be familiar with. If you or a family member would like to discuss future gifting opportunities, please contact your Marcum Tax Advisor.