We often give presents to celebrate a special event or please a significant other. Sometimes gifts serve a specific purpose, like lowering your potential estate tax burden. Let’s look at some ways to legally reduce your taxes through gift-giving.
First, it’s important to understand how estate taxes are calculated.
Florida does not have an inheritance or estate tax. However, the federal government collects tax of 40% on estates worth more than the current exemption limit. The exemption for an individual currently stands at a little more than $5 million, although this number will change periodically due to inflation. Married couples can shield twice that amount under certain circumstances. If the value of your estate exceeds the IRS exemption, your estate will end up with an estate tax bill.
Most people hope to pay the lowest tax possible. And there are ways to use tax and estate law to your advantage.
For example, making monetary gifts lowers the value of your estate, which in turn reduces your tax. If your estate drops below the exemption limit, the federal estate tax can even be eliminated. However, rules and regulations regarding gift giving must be followed.
Current IRS regulations allow an annual gift exclusion of $14,000. A husband and wife can each make $14,000 gifts to as many people as they want on an annual basis. As expected, restrictions apply so check with a qualified attorney or CPA before whipping out your checkbook.
Gifts may also take the form of payments for medical care and tuition expenses. Just make the gift to the actual provider, not the relative you want to help.
While discussing potential gifting with your attorney, make sure you talk about any tax consequences to the recipients. There may be ways you can decrease or eliminate any tax burden your heirs may face.
Charitable donations can minimize your taxable estate, while aiding your community. In addition to making specific bequests in your Will, assets may be transferred to trusts with one or more charities named as beneficiaries. Income from some assets may be available to you during your lifetime, with the remaining assets transferred to the charity or charities named in the trust document after your death. Consider engaging in a comprehensive discussion of charitable trusts next time you speak with your attorney.
We shouldn’t pay any more taxes than necessary. It’s best that your money and property be handed to your beneficiaries without giving a lot of it to the government. An added benefit to gifting? By sharing the wealth during your lifetime, you can enjoy seeing how your gifts benefit your loved ones.