The IRS has released the latest tax rate tables applicable for 2015. Among them are estate and gift exclusions.
Let’s starts with the gifts. There are no changes here and the exempt amount remains at $14,000. That means that one can give another person that amount without creating a taxable event. For example, a married couple can give each of their kids $28,000 without running into tax issues ($14,000 exclusion per person). A person can make numerous gifts of $14,000 as long as they are to different individuals.
When it comes to estate taxes it’s important to keep in mind that there is a federal and state estate tax. Estate taxes on a state level vary across all states in the exemption amount and tax rate, so this article only covers a federal estate tax. For 2015 the exemption amount was raised to $5.43 million per person. This is a total amount counting towards lifetime gifts. Maximum tax rate on the amount above the exception is 40%.
What is considered an estate?
Bases for calculating the value of an estate include:
- real estate
- bank accounts
- investment assets
- other assets, such as automobile
- retirement account
- life insurance
Life insurance is an interesting one because people often get it mixed up. The amount of the life insurance is income tax free but not estate tax free.
Estates have to be carefully planned while both husband and wife are still alive. This is important because that is the only opportunity for the surviving partner to take advantage of the joint exemption. Otherwise, the person inheriting the estate is a subject to individual exception. While that may not be a problem when it comes to federal exemption levels, the amounts may easily go above a state exemption level creating a tax liability. In order to avoid that, a person would have to disclaim some assets due to previously created credit shelter trust.
IRS release 26 CFR 601.602: Tax forms and instructions.