There is a gift tax in the United States along with the federal estate tax. The two taxes are said to be unified. There is a $5.34 million lifetime unified exclusion for the 2014 calendar year. Taxable gifts that you give along with the taxable value of your estate are calculated by the Internal Revenue Service. If the combination exceeds $5.34 million, further asset transfers are potentially taxable at a maximum rate of 40 percent.
Because the two taxes are unified, giving gifts while you are living using the unified exclusion will not provide any transfer tax efficiency. Transfers above the unified exclusion amount are exposed to taxation regardless of when they take place.
Annual Gift Tax Exclusion in Davenport Iowa
In addition to the unified lifetime gift/estate tax exclusion, there is also an annual gift tax exclusion. This exclusion is something that is completely separate from the unified lifetime exclusion.
Every year you may give as much as $14,000 to an unlimited number of gift recipients free of the gift tax.
The annual gift tax exclusion in Davenport Iowa can be quite valuable to those who are looking for transfer tax efficiency strategies. $14,000 may not sound like a lot of money, but let’s look at the broader ramifications.
If you are married, you have a $14,000 annual per person exclusion. Your spouse has his or her own exclusion. As a married couple you can combine these two exclusions to give as much as $28,000 to an unlimited number of gift recipients each year.
Let’s say that you give this amount to ten different people each year. You are transferring $280,000 annually tax-free without using any of your unified lifetime gift/estate tax exclusion. After 10 years, $2.8 million will have been transferred tax-free. And, the amount of your taxable estate will have been shaved down by nearly $3 million.
The annual gift tax exclusion can be used to give direct cash gifts as long as they do not exceed $14,000 per person in a year. However, that is not the only way to utilize this exclusion.
Many people who are looking for asset protection and tax efficiency will create family limited partnerships. We will go into these partnerships in detail in a different post.
It would be possible to distribute shares in a family limited partnership to members of your family tax-free each year using this $14,000 annual exclusion.
Irrevocable trusts are also utilized in the field of estate planning to set aside assets for the benefit of loved ones. Conveying assets into such a trust could be looked upon as an act of taxable gift giving by the IRS.
You may choose to fund an irrevocable trust incrementally in a tax-free manner by utilizing your annual $14,000 per person gift tax exclusion.
It should be noted that this $14,000 figure could be adjusted in the future to account for inflation.