Happy New Year! Some of you might be wondering how much you can give this year without having to file a gift tax return and whether you need to do some estate tax planning. Here are the key figures to keep in mind for 2016.
Estate Tax Exclusion
This year, the federal estate tax exclusion is $5,450,000. Therefore, if an estate is worth less than that amount, no federal estate tax will be due. The estate tax rate is 40% of the amount above estate tax exclusion. Each spouse has his or her own estate tax exemption and can use a predeceased spouse’s unused estate tax exemption. This principle is known as the “portability of unused exemption between spouses.” With portability, couples can now have assets of $10.9 million without owing any federal estate tax. A surviving spouse who remarries will lose the prior deceased spouse’s exemption.
The Connecticut estate tax exclusion remains at $2 million. Thus, if an estate is worth less than that amount, no Connecticut estate tax will be due. Depending on the amount above the Connecticut estate tax exclusion, the estate tax rate ranges from 7% to 12%. Each spouse has his or her own estate tax exemption. Unlike the federal estate tax, however, there is no portability in Connecticut. The only way for a couple to use their entire $4 million estate tax exclusion is by having an estate tax saving trust.
Gift Tax Exclusion
The annual federal gift tax exclusion remains at $14,000 for 2016. If a person makes gifts of $14,000 each to 4 different individuals, none of the gifts are considered taxable, and none of them have to be reported on the Federal Gift Tax Return Form 709. In 2016, a taxpayer can split gifts with his or her spouse so that $28,000 can be given to each donee. A taxpayer, however, must report split gifts on Form 709. The annual exclusion for gifts to non-citizen spouses is not the same as the annual exclusion for gifts to U.S. citizen spouses. That is because gifts to non-citizen spouses can be subject to federal gift tax. Gifts to citizen spouses are not subject to gift tax because of the unlimited gift tax marital deduction. The annual exclusion for gifts to non-citizen spouses in 2016 is $148,000.
Besides the annual exclusion, each taxpayer also has a lifetime gift tax exclusion. In 2016, the lifetime gift tax exclusion is $5,450,000. Thus, by applying some of your lifetime gift tax exclusion, a gift with a value in excess of the $14,000 annual exclusion will result in no gift tax owed, but you must file a Form 709 with the IRS. When you die, your estate tax exclusion will be reduced by the amount of the gift over the annual exclusion. The lifetime gift tax exclusion is the same for U.S. resident non-citizens and U.S. citizens.
The federal gift tax rate is 40% for the amount above the lifetime gift tax exclusion.
Although Connecticut uses the annual federal gift tax exclusions for its own annual gift tax exclusion, Connecticut has a different lifetime gift tax exclusion: $2 million for 2016. You have to file a Connecticut gift tax return if you make any taxable gifts. For example, if you are not married and you give $50,000 to each of your 2 children, you will have to file a Connecticut gift tax return even though no gift tax is payable.
Federal and Connecticut gift tax returns are due by April 15th of the year following the gift.
