Individuals and families frustrated by the current unpredictability of the estate and gift tax laws now have one bit of certainty for the upcoming new year. For the first time since 2009, the amount of annual gifts that taxpayers may make to their loved ones without triggering gift tax consequences is set to increase.
The annual gift tax exclusion is the dollar value of assets that may be given each year from one person to another without generating gift tax liability or reducing the available lifetime exemption, which is currently set at $5.12 million for the remainder of 2012. The annual exclusion is applied on a per-donee basis, and there is no limit to the number of donees who can receive the maximum tax-free gift each year. In addition, the law permits married couples to split gifts as if each spouse had contributed half of the value, thus doubling the amount of possible tax-free transfers for couples who elect to split gifts.
The annual exclusion amount was set at a flat $10,000 for nearly two decades prior to the millennium. Provisions in the Taxpayer Relief Act of 1997 expanded the exclusion by providing that, for tax years beginning after 1998, the exemption will be adjusted in $1,000 increments as necessary for inflation. Periodic inflation adjustments have taken place since 2002, and the exclusion amount has stood at $13,000 for the past four years. According to a recent Internal Revenue Service announcement, beginning on January 1, 2013, the annual exclusion amount will increase to $14,000 for individuals and $28,000 for married couples who split gifts.
Annual gifting is a powerful tool to reduce the value of one’s taxable estate. By making lifetime gifts, taxpayers avoid potential estate taxes on the value of the transferred assets as well as the taxes on any future appreciation of those assets. Furthermore, the assets removed from the donor’s taxable estate are not subject to probate. The increased annual exclusion amount will provide additional flexibility to individuals and families in incorporating a gifting strategy into their estate plans. A qualified estate planning professional can assist in the determination of whether gifting is appropriate in light of a family’s unique circumstances and goals.
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