Changes in 2015 for federal estate and gift taxes should be a consideration when developing or altering an estate plan this year and can have a big impact on the probate process if your loved one passes away.
The laws are continually changing in this area, with the most recent changes announced by the Internal Revenue Service reflecting adjustments for inflation. The changes include:
Estate Tax Exemption
The estate tax exemption increased from $5.34 million in 2014 to $5.43 million in 2015. This means when the value of the gross estate of a person who passes away in 2015 is larger than $5.43 million, the estate must file a federal estate tax return within nine months of the person’s death.
For most Americans, the total value of their estates will fall well below the $5.43 million marks and pass to beneficiaries tax-free. For those whose estate falls above the $5.43 million marks, the federal estate tax rate stays the same at 40%. If the deceased was married, a marital deduction allows all property left to the surviving spouse to be inherited tax-free, no matter the value.
Lifetime Gift Tax Exemption & Annual Gift Tax Exclusion
In the U.S., Americans who gift large amounts of money must pay taxes on those contributions. Fortunately, over the course of your life, you can gift up to a certain amount before being subject to the 40% gift tax rate. In 2015, the lifetime gift tax exemption increased 2015 to $5.43 million from $5.34 million.
There are additional protections, as well. The annual gift tax exclusion allows you to give up to $14,000 to as many people as you’d like without those gifts counting towards your $5.43 million lifetime exemption.
This can be a bit confusing, so here is an example to break it down:
John Smith gives $20,000 to 2 loved ones in 2015. Each of those amounts exceeds the $14,000 gift tax exclusion. Assuming that throughout the course of his life, he has not given away more than the $5.43 million lifetime gift tax exemption, then his lifetime exception would be reduced only by the amount of the gifts that were in excess of the $14,000 exclusion.
For each $20,000 John gave, he should subtract the $14,000 exemption and multiply it by two (because John gave 2 gifts of this amount). The $12,000 that remains is his taxable amount. And since John hasn’t exceeded his lifetime gift amount, that $12,000 is still not taxed in 2015; it’s simply deducted from his lifetime gift allowance of $5.43 million.
Generation-skipping Transfer Tax Exemption
The generation-skipping transfer tax (GSTT) is taxed on the property that’s passed down from a grandparent to a grandchild or great-grandchild through a will or trust. It is also assessed on the property that is passed to unrelated individuals who are more than 37.5 years younger than the decedent.
In 2015, the GSTT has also increased to $5.43 million. The maximum federal tax rate for a generation-skipping transfer is unchanged at 40%.
Estate and Trust Income Tax Brackets for 2015
Estates and trusts that earn income may be subject to federal income tax. In 2015, the federal income tax brackets for estates and trusts will be:
| If taxable income is: | The tax rate is: |
| $2,500 or less | 15% of taxable income |
| $2,500 to $5,900 | $375 plus 25% of the amount in excess of $2,500 |
| $5,900 to $9,050 | $1,225 plus 28% of the amount in excess of $5,900 |
| $9,050 to $12,300 | $2,107 plus 33% of the amount in excess of $9,050 |
| $12,300 or more | $3,179.5 plus $39.6% of amount in excess of $12,300 |
A Houston probate lawyer help individuals and families understand the impact of these taxes and come up with a plan to minimize their impact. Contact us today for a consultation.