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Understanding Federal Estate and Gift Taxes

How the Federal Gift and Estate Tax Work Together

The federal tax that is placed on things a person purchases during their lifetime and assets left at death are part of a unified federal gift and estate tax. The point of these taxes is so that whether you are giving assets away while you’re alive or leaving them to someone when you pass, you’re getting taxed the same way and at the same rate. Without a gift tax, people could completely give away everything they own right before death to avoid paying the taxes.

This tax will only apply to those who give away or leave gifts over $5.45 million. Once the total goes over that number a person will be required to pay federal gift and estate tax. For example, if you give your child your house while you are still alive and it is worth $1 million and once you pass they receive $4 million in stocks and bonds, there will be no federal gift or estate taxes due. The exemption amount is indexed for inflation and goes up each year.  There are many other gifts that are not subject to the gift tax along with the $5.45 million exemption. One of these exemptions would be gifts to your spouse. Therefore, if you give your $1 million house and $4 million stocks and bonds to your children and another $7 million to your spouse, you still will not owe any gift tax.

Gift Tax Basics

A gift is anything taxable that a person gives away while they are living. If the gift you are giving away is taxable, the person who is giving the gift must file a gift tax return and pay what is owed. This is not a responsibility of the recipient of the gift. Most of the time a person’s gift will go untaxed because it usually does not exceed the $5.45 million exemption. The tax is not owed until you exceed that amount and very few people give away that much money during their lives.

Estate Tax Basics

Federal estate tax is calculated once a person passes away. The amount of taxable lifetime gifts is included along with the property that is left behind. These items are added together to formulate a total that may be subject to estate tax. No tax will be due unless the taxable items exceed the exemption rate.

What’s a gift?

Any transfer in which you receive nothing or less than the fair market value in return are considered a gift. The fair market value is determined when the price at which an asset would sell when there’s a willing and knowledgeable buyer and seller. If a person gives another person a check for $2,000 that is a gift, and if a person sells their house to a relative, for example, for $10,000 when the house has been assessed at $100,000 than that would be a $90,000 gift.

Here is a list of some common NOT taxable gifts:

  • In 2016 any gifts less than or equal to $14,000 will not be taxed.
  • If a person pays tuition directly do the school, it will not be taxed.
  • Medical expenses you pay directly.
  • Gifts to your spouse (if your spouse is a U.S. citizen).
  • Gifts to a political organization for its use.
  • Gifts to certain charities.

What’s the gift tax rate?

The current federal gift/estate tax rate is 40%.

Filing a Federal Gift Tax Return

If you make a taxable gift, then you’ll need to file a gift tax return (IRS Form 709). This is NOT something you should do on your own. Look for an experienced CPA or financial expert of some kind and let them work through it with you. They may be able to help you avoid the tax altogether.

 

*For more about the federal gift and estate tax, see IRS Publication 950, Introduction to Estate and Gift Taxes.

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10 of the worst states for retirees

New York: 8.49% sales tax

Topping the list is the great Empire State. The trouble with this is that everything costs more and not by a little. In Manhattan, you will find the highest cost of living than any other city in the U.S. The average apartment there costs $3,984, 4 times the national average. Everyday activities commonly cost more too, like bowling or a haircut. Another huge burden on retirees are the high tax rates. New York has the highest state and local tax burden of any other nation. It sits at 12.7% which is much higher than the national average of 9.5%.

http://www.osc.state.ny.us/retire/

California: 8.48% sales tax

The Golden State is among the worst for retirement security because of low retirement income scores and high retiree cost scores. The state’s 8.5 percent unemployment rate for workers over age 55 is the second worst in the country (after Nevada).

https://www.calpers.ca.gov/

Minnesota: 7.27% sales tax

This state full of lakes is commonly on the list of the least tax-friendly states for retirees. The state seems to tax everything they possibly can, including social security benefits. Although the average household income for people who are 65 and older is beneath the thresholds for the highest tax bracket, the cost of living in Minnesota is far above the national average. Lifetime health care and median home value for people 65 and older are higher than the national average.

https://www.msrs.state.mn.us/

New Jersey: 7% sales tax

The Garden State is a very popular place for retirees although almost half of it’s residents age 55 and older spend more than 30% of their income on housing costs. This is the highest rate of any state. New Jersey is among the worst states for taxes due to its high income, sales and property tax rates.

http://www.state.nj.us/treasury/pensions/

Nebraska: 6.87% sales tax

Although Nebraska recently stopped taxing Social Security benefits they continue to tax most other retirement income, including withdrawals and public and private pensions. The state’s top income-tax rate applies to taxable income above $29,590 for single filers and $59,180 for joint filers. The median property tax on the median home value ($133,800) is $2,474. This is the seventh-highest property-tax rate in the U.S. The state’s inheritance tax is a local tax that rangers from 1% to 18% and is administered by counties.

http://npers.ne.gov/SelfService/

Utah: 6.69% sales tax

Utah does not offer many tax breaks for retirees. Incomes from IRAs, 401 (k)s, pensions and Social Security benefits are taxable at the 5% flat tax rate. They do offer a retirement-income tax credit of a maximum of $450 per person and $900 for a married couple. This credit is phased out at 2.5 cents per dollar of a person’s modified gross income. One positive is that property taxes are modest. The median property tax on a median home valued at $223, 200 is $1,480, which is the 11th lowest in the U.S.

https://www.urs.org/

Connecticut: 6.35% sales tax

Although this beautiful state offers a very appealing lifestyle with the scenery and attractions, Connecticut is a very expensive place to live when taking into consideration of property and sales tax. The average home in Stamford costs $626,189 which is double the national average. Your coffee and other everyday things will cost as much as 23% more than the U.S. average. Gas is almost 4% higher than the national average so I hope you plan to stay if you end up in Connecticut.

http://www.osc.ct.gov/empret/

Vermont: 6.17% sales tax

The beautiful green mountain state does not favor retirees. Almost all retirement income is taxed and as much as 85% of your benefits could be taxed. Vermont limits deductions to $15,000 for singles and $31,500 for married couples. If your income is $1 million then you would be paying about $5,000 in state taxes every year. Local jurisdictions can add 1% to the state sales tax. Tax on restaurant meals and lodging is 9%, and 10% if you order a glass of wine or beer while you’re there. The median property tax on the state’s median home value of $214,600 is $3,797, the eighth-highest in the U.S.

http://www.vermonttreasurer.gov/retirement/state-vsrs

Montana: No sales tax

Even though you will not have to pay sales tax in this gorgeous state you won’t be thinking about that when you receive your state tax bill. Montana taxes almost all of your retirement income and it’s 6.9% top rate starts when your income exceeds only $17,400. The property tax rate will brighten your mood a little when you find out that the median property tax on the median home ($196,800) is $1,653 which is below the average for the U.S.

http://mpera.mt.gov/pers.shtml

Oregon: No sales tax

Oregon has appealing qualities for those who love the city but also have a passion for nature. Portland is a popular place for coffee shops and craft breweries. If you are craving the great outdoors you can visit Mount Hood and the rugged coastline. The major downside of this beautiful place is the high cost of living. Apartment rent in Portland averages $2,211 per month which is more than double the national average. Oregon also has high taxes. Oregon’s top personal income tax rate is 9.9% which puts it at the 3rd highest in the country.    

http://www.oregon.gov/PERS/Pages/index.aspx

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Differences Between 529 Prepaid College Tuition Plans and College Savings Plan

Are you looking at all of your options for saving for your children’s college tuition or maybe even your own? Here is a brief overview of some of your options on the 529 plan. Some of these plans are sponsored by state, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

Prepaid Tuition Plan 

  • This plan will lock in the price of tuition at all eligible colleges and universities.
  • All of the options cover tuition and mandatory fees only. Some of the plans will allow you to purchase a room and board option or use extra tuition credits for expenses that are qualified.
  • Most of these plans look at the age of the beneficiary and the number of years of college tuition that is purchased to set a lump sum and installment payments prior to the purchase.
  • Many of the state plans are guaranteed or backed by state.
  • There are usually age and/or grade limits for the beneficiary.
  • Most of the state plans require that either the owner or the beneficiary of the plan be a state resident.
  • Most of these plans have limited options for the enrollm
    ent period.

College Savings Plan

  • This plan has no lock on the cost of college.
  • All qualified higher education expenses are covered, including:
    • Books
    • Room & Board
    • Tuition
    • Mandatory fees
  • Many of these plans have contribution limits in excess of $200,000.
  • There is no state guarantee on investments. The options are subject to market risk and may make no profit or possibly decline in value.
  • There are no age limits and these plans are open to adults and children.
  • There is no residency requirement BUT nonresidents are only eligible to select plans through financial advisers or brokers.
  • You do not have to worry about rushing to apply in time because enrollment is open year round.

Information from: https://www.sec.gov/investor/pubs/intro529.htm

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