Dear Clients and Friends,

Another tax season has passed and we had a record number of referrals from you.  We appreciate your confidence in us and thank you for recommending your friends.

The IRS is issuing refunds quickly, especially for those returns electronically filed with a direct deposit option chosen.  If you haven't received your refund, you can check the status on the IRS website at www.irs.gov.

Very truly yours,

Suzanne LoBiondo and Christopher Cheeseman

Estate and Income Tax Planning - Gift Tax Exclusions 

Most people don't like to think about planning their estate, but it's an important part of ensuring the financial security of your loved ones. One of the most common tools used in estate planning - and one that everyone should at least give careful consideration to - is a program of giving gifts. A carefully planned gift-giving program can reduce the amount of your estate that is subject to tax while still passing on wealth.

Congress has not made estate planning easy over the past several years. However, the American Taxpayer Relief Act of 2012 (ATRA),  passed January 1 of this year, brings some much-needed certainty.  ATRA sets the unified gift and estate tax exclusion at $5 million (indexed for inflation) for 2013 and subsequent years. The maximum estate and gift tax rate is 40 percent for 2013 and subsequent years.

Aside from any immediate financial needs of a gift recipient, the main motivation for making large gifts during your lifetime, rather than waiting to pass on your wealth at death, is to remove the future appreciation from your eventual taxable estate. There is a certain degree of risk in this strategy, however, since your donee receives a tax basis equal to what you paid for the asset while your heirs will receive a stepped-up tax basis equal to the asset's value at death.

While large gifts can be subject to various rules, you can give away up to an "annual exclusion amount" per recipient per year free of gift tax and free of any future offset against any exemption amount used to lower future gift or estate taxes. For 2013, that annual exclusion amount is $14,000 (up from $13,000 in 2012).

There is a great deal of flexibility in the types of property that can be transferred. Gifts that qualify for the $14,000 annual exclusion can be made in money, property such as stocks or bonds, or even a life insurance policy, as long as the recipient gets the present right to possess or use the property. The gift may be in trust if the terms of the trust give the recipient the immediate right to the property or income from the property.

You can give up to $28,000 in 2013 per recipient per year if you are married and your spouse consents to "split" your gifts. This is useful for spouses who do not own an equal amount of property. The spouse with less property can consent to gifts made by the wealthier spouse, thereby effectively doubling the amount that the wealthier spouse can give away tax-free. To take advantage of "gift splitting," both spouses must be U.S. citizens or residents. The consent must be given on a gift tax return, so a return must be filed even if no gift tax is due. However, a short form gift tax return is available. Don't underestimate how an annual gift-giving plan using the $28,000 split gift exclusion per donee alone can facilitate the tax-efficient transfer of family wealth.  

As emphasized in discussing large gifts, above, but also applicable to smaller gifts, it is important to remember when you make a gift that the recipient must take your basis in the property. This means that if the recipient sells the property, any gain on the sale will be measured using what you paid for the property, not what the property was worth when he or she received it. In contrast, if property is transferred to another through your estate and whether or not estate tax is owed, the recipient can use the value of the property at that time in measuring any gain on the sale of the property. Consequently, choosing the right property to achieve your goals is an important aspect of any gift-giving program.

Another way to further the financial security of others without incurring gift tax is by payment of medical and educational expenses. You can pay an unlimited amount for these expenses tax-free as long as the payments are made directly to the medical services provider or educational institution. The person you benefit does not need to qualify as a dependent for tax purposes. Any medical expenses, however, must not be reimbursed by insurance, to either you or to the beneficiary.

If used properly, a program of gift-giving can benefit everyone involved. Passage of ATRA makes it all the more important for you to consider how a gift giving plan can be advantageous now. If you have any questions about the best way of using gifts as part of your overall financial plan, please call us.