Estate and gift tax exclusions increase in 2018, but kiddie tax earnings don't get any inflation bump
Thursday, October 26, 2017
Welcome to Part 6 of the ol' blog's series on 2018 inflation adjustments.
Today we look at changes to estate, gift and kiddie taxes.
You can find links to all 2018 inflation posts in the first item:
Income Tax Brackets and Rates.
Note: The 2018 figures apply to 2018 tax returns that are due in 2019.
For comparison purposes, you'll also find 2017 amounts to be used
in filing 2017 tax returns due next April.
It's always good to be rich, even when the inevitabilities of death and taxes meet.
That's because the Internal Revenue Code, for now, excludes a nice chunk of change from federal taxation.
Estate tax exclusion increase: It's possible that the estate tax could die again like it did in 2010, and for more than just one year if the Republican Party gets the tax reform it wants.
But just in case that doesn't happen, the Internal Revenue Service issued the 2018 inflation adjustment for estates left in 2018. It's $5.6 million.
That means if the assets left are less than that, then Uncle Sam doesn’t get a tax bite of the estate.
And that estate tax exclusion amount is per person, so a married couple's combined estate tax exclusion in 2018 is $11.2 million.
That's up from the $5.49 million per person and $10.98 million for married couples that's excluded from estate tax in 2017.
Tax-free gifts worth more, too: Many wealthy individuals make use of their money by giving some of it away while they're still around to get the thanks.
Such financial gifts make for good tax planning, too.
When all your assets are left to be distributed after you're gone, your estate's total value could enough to trigger the estate tax.
But by giving some of your assets — anything from cash to real property to family heirlooms — while you're still alive, you take those values out of the amount of estate that could be subject to the 40 percent federal estate tax.
Even better, those gifts are not taxable to the recipient.
Best, as long as you follow the rules, the gifts you won't face any gift tax.
The major rule is, of course, that you can't just give away all your riches to escape the tax collector. You're limited to a specific amount to each person you give cash or anything else of value.
For 2018, that gift exclusion amount is $15,000. That's a $1,000 hike over the 2017 amount and the first increase since 2013.
Similar to the estate tax exclusion amount, if you're married you and your spouse each can give $15,000 to the same person. That means a married couple with three kids and five grandchildren can each give $30,000 next year (a total of $240,000) to those family members without facing gift tax consequences.
And while most able and generous givers do share the wealth with family, you can give that 15-grand amount to anyone. (Just saying, feel free to say it with cash if you really enjoy the ol' blog.)
Adding up all those gifts: As long as you stay at or under the annual gift tax exclusion amount, the gifts will not count toward another limit, the lifetime gift exemption.
As the name indicates, the lifetime gift exemption is the total amount of gifts that can be given away tax-free by a person over his or her lifetime to any number of people.
This limit is necessary because without it, rich folks could simply give away the bulk of their money or property while living to avoid estate taxes after death.
But the lifetime gift exemption amount is pretty generous. It's the same as the estate tax exclusion, the $5.6 million in 2018 and $5.49 million in 2017.
If you do go over the lifetime gift exclusion, you will owe a 40 percent tax on the gifts exceeding the lifetime exclusion amount.
Counting the kiddie tax: Since children, and particularly grandchildren, are often recipients of monetary gifts from wealthy parents and grandparents, all family members need to be aware of potential tax costs.
Often, such financial gifts are invested by the young person, which is a good way to teach him or her about making money work for them rather than just working for money. However, the young investors and their parents need to keep an eye on the annual amount of unearned income.
When young people (up to age 23 if a full-time student; 18 if not going to college) have unearned income that exceed certain limits, the kiddie tax comes into play on those successful investments.
For 2018, a young investor's first $1,050 of unearned income is not taxable. But the next $1,050 is taxes at the child's tax rate, typically the lowest 10 percent rate. That's the same as in 2017.
And for both 2017 and 2018 tax years, when a child's investment earnings top $2,100 (that's the untaxed $1,050 and the next $1,050 taxed at the child's rate), the excess unearned income is taxed at the parents' tax rate.
Regardless of where you are in dealing with your estate and potential heirs, be sure to stay on top of inflation. If the estate tax stays, the annual adjustments could make a big difference in how you (and your family members) deal with your assets here and now.
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