As most taxpayers with even moderate estates already know, the passage of the American Taxpayer Relief Act of 2012 made permanent the current lifetime exemption limit of $5 million (adjusted each year for inflation) to the gift and estate tax. This means that a taxpayer can make gifts over a lifetime up to that amount without incurring gift taxes. While this is certainly welcome news, there is even more you can do to limit your gift and estate tax exposure. Using the annual gift tax exclusion is one of those things.
The annual gift tax exclusion lets you transfer up to $14,000 to as many beneficiaries as you wish each year. Moreover, a married couple may combine their exclusions and transfer double the assets, or $28,000 per year. Keep in mind that IRS Form 709 may be required if you choose to give large gifts. Along with your annual gifts not being subject to gift taxes, they also do not count toward your lifetime exclusion limit. Imagine the following scenario:
- You and your spouse combine your annual gift tax exclusions to transfer $28,000 to your two grown children and six grandchildren each year.
- You do this for ten years.
- You have transferred $2.24 million in assets over the course of ten years without incurring gift taxes.
- You both still have another $5 million plus available to gift in your estate plan.
- You have saved $896,000 in taxes assuming you are taxed at the maximum gift tax rate of 40 percent.
Talk to your estate planning attorney about how best to use the annual gift tax exclusion.
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