IRS Raises Limit of Lifetime Gifts for 2015
By Alan G. Orlowsky
Recently, the Internal Revenue Service announced an increase in the lifetime limit of tax-free transfers during life or at death. This year, the amount known as the basic exclusion was set at $5.34 million. For 2015, the basic exclusion will be increased to $5.43 million, but there will be no increase in the annual exclusion, which allows for a person to give up to $14,000 per year tax-free.
Tax-Free Basic Exclusion
Also known as the lifetime exemption, the lifetime gift tax exclusion and estate tax exclusion are expressed as a total amount, and it is possible to use the total amount of the exclusion to transfer assets to another during life, at death, or through a combination of both without being taxed on the total. As discussed in a previous post, if you exceed the tax-free limit, either you or your heirs will owe taxes on the amount up to 40 percent.
The IRS expects you to keep a running total of the amount of your basic exclusion that is spent over your lifetime so that it can be deducted from your total exclusion at the time of your death. For example, if you pass away in 2015 and have already given $2 million in gifts, then your estate can give $3.43 million to heirs tax-free.
How to Use the Additional Basic Exclusion
There are a few different ways that you can use the additional $90,000 of tax-free gifts. However, before you give away the extra exclusion, consider how well your previous gifts have been received and used. If a gift was meant to be saved but was instead used on frivolous things by an heir, consider placing the gift in a trust.
Another way to use the additional exclusion is to benefit an heir or other loved one who was not included in previous gifts. This may include another child, grandchild, or a friend. Married couples get an extra break with the exclusion because they can share the basic exclusion now and give more to their children without being taxed.
Clarification for the Annual Exclusion
Many people mistakenly believe that the annual exclusion increases with the basic exclusion. However, the annual exclusion of $14,000 remains the same. Spouses can double the exclusion amount to $28,000 when giving a gift, but gifts any higher are taxed.
In addition, if your spouse is a U.S. citizen, an unlimited marital deduction applies to most gifts, even if the gifts exceed the annual exclusion amount. However, that rule does not apply if your spouse is not a U.S. citizen. In that case, according to the IRS press release, the yearly limit on tax-free gifts to the non-citizen spouse next year is $147,000, up from $145,000 for 2014. Any additional gifts to a non-citizen spouse count against the $5.43 million basic exclusion.
Contact an Illinois Estate Planning Attorney
The increased gift limit creates new opportunities for people who want to create or revise their current estate plan. If you or a loved one has questions regarding the increased exclusion or other estate planning issues in Northbrook, Evanston, Skokie, Glenview, Glencoe, or Highland Park, let the experienced attorneys at Orlowsky & Wilson, Ltd. help. Call or contact the office today for a consultation of your case.