Each year at this time, the Internal Revenue Service publishes certain adjustments to the tax laws that are based upon inflation. The affected tax provisions include adjustments to income tax rates, personal exemption amounts, and the Alternative Minimum Tax exemption amount. Two of the most important adjustments concern the amount of the unified credit for estate and gift taxes, and the annual gift tax exclusion amount.
The American Taxpayer Relief Act of 2013 (“ATRA”) permanently established the unified credit exemption amount at $5,000,000 for each person, and indexed this amount to inflation every year. In 2013 the unified credit was set at $5,250,000. The adjusted amount for 2014 is $5,340,000. This amount can be gifted to your children or heirs while you are alive without paying federal gift tax, or distributed to your heirs at your death without federal estate tax. Married couples can combine both of their Unified Credit amounts to transfer to their heirs $10,680,000 worth of assets without federal estate tax based on the 2014 adjusted amounts. If a spouse does not use his or her total unified credit to transfer assets at death, the surviving spouse can received this unused portion and apply it in the future at the second death. This “exemption portability” is now a permanent feature of tax law since passage of ATRA. However, there are some important steps which must be taken at the first death to quantify this unused amount to be transferred to the surviving spouse, so please consult an attorney if you need to use this portability feature.
The annual gift tax exclusion for 2014 remains unchanged at $14,000. This means you can give up to $14,000 to an unlimited number of people each year without paying federal gift tax. In other words, a once a year gift or many smaller gifts to the same person during the year that do not exceed this $14,000 total do not count under the federal gift tax law.
Landowners sometimes try and use this gift tax exclusion amount to transfer an interest in their land to their children. But land is hard to value for this purpose and difficult to deed in fractional amounts. Landowners who own their land in an entity, such as a limited partnership or limited liability company, instead can give shares of that entity to their children. There are still challenging valuation issues, but at least the gifts are recorded in the books of the entity and not recorded in the deed records.
If your gift to an individual exceeds the $14,000 limit then you are generally responsible for paying the gift tax. You must report the amount which the gift which exceeds the exclusion, and that excess amount is deducted from unified credit. You don’t write a check to the IRS for gift tax unless you use up your entire unified credit amount. Inflation is low now so the annual exclusion may not rise in the near term. The exclusion amount can only be increased in $1,000 increments.