In December of 2010, a legislative measure was passed called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Provisions contained within this act impacted the parameters of the federal estate tax.
For 2011 the estate tax credit or exclusion was set at $5 million, with an adjustment for inflation allowed for 2012. The maximum rate of the tax was placed at 35 percent.
In 2012 the adjustment for inflation raised the exclusion to $5.12 million.
At the end of 2012 the news cycles were dominated by talk about the looming “fiscal cliff.” Falling off this cliff would have resulted in automatic spending cuts and tax increases.
One of these increases would have been a reduction in the exclusion from $5.12 million to just $1 million. This would have exposed many more people to the tax. The maximum estate tax rate would have risen to an eye-popping 55% if the country plunged over this cliff.
This scenario was averted because of the passage of a new tax relief act that is now known as the American Taxpayer Relief Act of 2012.
Under the terms of this act, the base $5 million exclusion that was put into place for 2011 will stay in place, with adjustments for inflation. The top rate went up to 40 percent.
2014 Adjustment Announced
The estate tax exclusion adjustment for 2014 has been announced by the Internal Revenue Service. For 2014, the exclusion is $5.34 million.
Because this is a per person exclusion, a married couple would have a total exclusion of $10.68 million. The estate tax exclusion is portable, which means your spouse could use any unused portion of your exclusion in addition to his or her own if you were to pass away.
Unified Gift and Estate Tax
To fully understand the taxes on asset transfers in the United States, you should recognize the fact that there is a gift tax in place along with the estate tax. The two levies are unified. As a result, the $5.34 million unified exclusion that will be in place next year encompasses both taxable gifts during your lifetime as well as the value of your estate at your death.
For example, if you gave $3.34 million in nontaxable gifts during your life using this exclusion, there would only be $2 million left to apply to your estate.
Separate Annual Gift Tax Exclusion
In addition to the unified gift and estate tax exclusion, there is a separate annual gift tax exclusion. You can give as much as $14,000 each to any number of gift recipients within a year, free of gift tax. If you do this, you are not reducing the amount of your available unified exclusion.
Because this is a per person annual exclusion, a married couple could give as much as $28,000 within a calendar year to any number of gift recipients free of taxation.
For more information on estate and tax planning, contact Zimmer Law Firm at 513.721.1513 today for a consultation.