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Strategic Steps in Reducing Your Estate Taxes

August 3, 2016

This year, not many Americans have to be concerned about their federal gift tax or estate tax. According to the new 2016 estate tax laws, deaths that occurred during this period allowed for exemptions of $5.45 million. This means that you can give or leave up to this amount for your loved ones without incurring federal taxes. Every year, the amount increases as an adjustment to inflation. Married couples are allowed to leave a combined amount, while still being able to avoid federal estate tax. However, check carefully because estate taxes could be imposed on smaller estates in some states.

The Tax Bill

If you think that you may owe estate taxes and want to reduce your tax bill or avoid it, then many accounting experts may recommend giving away as many properties owned while you are alive. And even if you don’t care about how much estate tax you have to pay, giving offers its own benefits because while you are alive, you will be able to see how those receiving your gifts will enjoy it.

Cash Gifts
In the year 2016, Americans can give away unrestricted amounts of $14,000 in cash or other property – without having to pay taxes on it. To make sure that you are entitled to these savings, bear in mind that no single cash recipient can get more than $14,000 in one year. There is a yearly exclusion to consider.

The Yearly Exclusion
The exception rule for giving $14,000 in one year to one individual is straightforward. For example, if you were to give $25,000 to one person, then $14,000 out of that amount is exempt because the federal government sees this as an amount that the law allows you to give. However, be aware that you would have to pay the gift tax on the remaining amount of $11,000. The federal government does factor in cost of living and inflation. Therefore, the amount will increase in increments of $1,000 each year.

Married Couples

For married couples, this rule allows them to double the amount that they can give. For married couples, the gift amount would be $28,000 for the first year. In the example above, the married couple would not owe any gift tax. According to the IRS Code § 2513, whether one person or other gives $28,000 in cash gift, it still counts as both consenting to the gift. Let’s say that Janet and Jeff are an older married couple and they decided to give their daughter and her husband some money for making a down payment on their first home. They can take advantage of the exemption rule for a married couple by giving their daughter and her husband $28,000 for the down payment instead of $14,000. As soon as the first year ends, they can give away an additional $56,000.

The gifting rule for other recipients such as one spouse or child is intricate and may need to be explained by an accountant that knows the laws. For that reason, contact Bloch, Rothman and Associates at 303-321-7160 for a free consultation on estate tax or gift tax procedures allowed by the federal government.