Sharing the wealth & avoiding tax on it thanks to estate, gift, capital gains and kiddie tax inflation adjustments
Welcome to Part 6 of the ol' blog's 2019 series on tax inflation adjustments.
Today we look at changes to estate, gift, capital gains and kiddie tax provisions.
You can find links to all 2019 inflation posts
in the series' first item: income tax brackets and rates.
Note: The 2019 figures apply to 2019 returns that are due in April 2020.
For comparison purposes, you'll also find 2018 amounts to be used
in filing this year's 2018 tax return due April 15, 2019.
Death and taxes are inevitable, but the tax bill for the very wealthy keeps shrinking thanks to recent tax law changes and inflation adjustments.
The Tax Cuts and Jobs Act (TCJA) dramatically increased the amount of assets that are outside Uncle Sam's reach when the owner dies.
Essentially, the tax reform bill doubled the amount that isn't subject to the U.S. estate tax.
Estate tax exclusion increase: Throughout the years that there's been an estate tax (it died for the 2010 tax year, but it was resurrected the next year by Congress), there's been a base exemption (or exclusion) amount. That's the value of a decedent's assets that are not taxed at the federal level.
These amounts have been adjusted for inflation, but the new tax law reset the base in 2018. It went from $5.49 million per person (or a $10.98 million combined exclusion for a married couple) in 2017 to $10 million per person (or twice that for jointly filing couples) for folks who pass away this year.
After inflation adjustments for the 2018 tax year, that means someone can leave an estate of $11.18 million ($22.36 million for a married couple) without any federal tax consequences.
For 2019, inflation bumps up the estate tax exclusion amount even more. A rich individual can leave heirs a tax-free estate of up to $11.4 million next year. And yes, that's an estate tax exemption amount of $22.8 million for a married couple in 2019.
Only when an estate exceeds those amounts is the 40 percent federal estate tax assessed on the overage.
The increased estate exemption amount, however, is temporary (for now). It's one of the provisions of the TCJA that is set to expire at the end of 2025. If that happens, the base exclusion amount will return to $5 million, adjusted for inflation.
Note, too, that more than two dozen states and the District of Columbia have an estate and/or inheritance tax.
Tax-free gifting, too: The ever-shifting legislative whims of lawmakers on Capitol Hill, as well as state estate laws is why everyone, even those whose estates are nowhere near the millions that are tax-free upon their deaths, needs an estate plan.
One of the most common tools in this area is giving away some of your wealth while you're still around to get the thanks.
The annual exclusion for gifts is $15,000 for calendar year 2019, the same as it is for 2018.
You can give these gifts of up to $15,000 per person to as many people as you wish, and this generosity is NOT limited to family, so if you have some spare cash and really enjoy the ol' blog, just let me know.
Also, the gifts are not limited to dollars. You can give assets valued up to the limit, such as gifts of real property and family heirlooms.
By bestowing your cash and property beforehand, you can reduce the amount of your assets left to be distributed after you're gone. This is a good way to dole out your estate the way you want and keep its value under the amount that will trigger the federal estate tax.
Even better, those gifts are not taxable to the recipient. And best of all, 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. That's why the annual gift exclusion was created.
But like the estate tax exemption, the $15,000 limit this and next year (and whatever amount it might be further down the line) is per person. So 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 in 2018 and 2018 to those eight family members for a combined gift total of $240,000 each year without facing gift tax consequences.
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.
Again, that's $11.18 million ($22.36 million for a married couple) in 2018 and $11.4 million per person ($22.8 million per jointly filing couple) in 2019.
If you do go over the lifetime gift exclusion, you will owe a 40 percent tax on those excessive gifts.
Counting the kiddie tax: Since children, and particularly grandchildren, often receive monetary gifts from wealthy parents and grandparents, all family members need to be aware of potential tax costs here.
Such family financial gifts often are invested by the young recipient person, which is a good way to teach the child 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 2019, a young investor's first $1,100 of unearned income is not taxable. But the next $1,100 is taxes at the child's tax rate, typically the lowest 10 percent rate. In both cases, that's $50 than the 2018 kiddie tax trigger of $1,050 in unearned income.
When a child's investment earnings do top the combined limit — that's $2,100 (the untaxed $1,050 and the next $1,050 taxed at the child's rate) in 2018 and $2,200 ($1,100 x 2) in 2019 — the young financier's excess unearned income is taxed at the parents' tax rate.
Regardless of where you are in dealing with your family's investments, your estate and which potential heirs will get what when, be sure to stay on top of inflation. The IRS does.
And those annual estate, gift and kiddie tax cost-of-living adjustments could make a big difference in how you and your family deal with and benefit from your assets here and now.
Lower capital gains taxes for all: Youngsters, however, aren't the only ones with investments. Wealthier folks have always known that instead of simply making money, it's better to let your money do much of the work.
This is possible in part via the special tax treatment of capital gains.
There are two types of capital gains taxes.
One applies to the profit on assets you sell after owning them for a year or less. In these cases, these short-term capital gains get no tax break. You'll owe tax on your net profits at your ordinary income tax rate, which could be as high as 37 percent.
But if you hang onto the assets for more than a year before selling, your investment patience is rewarded with a generally lower tax rate on any profits from these long-term asset sales.
There are three long-term capital gains tax rates: 0 percent, 15 percent and 20 percent. Which one applies depends on your overall income and filing status.
The TCJA kept the three long-term capital gains tax rates. But changes to the ordinary tax rates, both the tax rates and income to which they apply, disrupted the income brackets that applied under prior law. So it set specific long-term capital gains tax rates, which now also are adjusted for inflation.
For the 2019 tax year, a single taxpayer can make up to $39,375 and not owe any capital gains tax on investment proceeds. The income cut-off for no capital gains tax for heads of households is $52,750. Married joint filers making up to $78,750 will be in the 0 percent capital gains tax category.
That's an increase from the 2018 no capital gains tax levels of $38,600 for a single taxpayer; $51,700 for head of household filers; and $77,200 for married joint filers.
In 2019 you'll owe 15 percent on capital gains if you're a single filer with income between $39,376 and $434,550; a head of household taxpayer with income between $52,751 and $461,700; or a jointly filing couple with combined income between $78,751 and $488,850.
For comparison, the 2018 tax brackets for 15 percent capital gains are $38,601 to $425,800 for single taxpayers; between $51,701 and $452,400 for heads of households; from $77,201 to $479,000 for jointly filing married couples.
Finally, in 2019 the top 20 percent capital gains tax rate is assessed on single taxpayers with income of more than $434,551; head of household filers with income of more than $461,701; and married joint filers with income exceeding $488,851.
The top 20 percent capital gains tax rate for 2018 tax returns is assessed on single taxpayers with income of more than $425,800; head of household filers with income of more than $452,400; and married joint filers with income exceeding $479,000.
Whew! That's a lot to consider if you make a lot of money and want to keep your taxes on it as low as possible. I guess being wealthy is not as easy as it looks!