Welcome to today's live chat about year-end gift-giving!
Joining us are the editors of Kiplinger's Retirement Report: Editor Susan Garland, Managing Editor Rachel Sheedy and Associate Editor Eleanor Laise.
HI all...looking forward to your questions...
Hi everyone! Looking forward to your questions.
Alright, to get us started, can you explain why -- with all the uncertainty over tax law changes -- there is such a strong case for making sizable gifts today?
This is definitely a tricky time for year-end planning, with so many tax-law changes up in the air. But with higher rates on the horizon for income, capital gains, and dividends -- and higher income folks facing possible limitations on itemized deductions -- many advisers feel the balance tilts toward making big gifts before year-end.
And if you take action before year end, at least you can be certain of the tax consequences. Whereas future tax rates are anything but certain.
At this point, the estate tax threshold is scheduled to revert to $1 million ($2 million for a couple) in 2012. It's $5.12 million per person now. So if you were thinking of giving away some appreciated stock to family members, for example, this could be the time to do it. At the very least, it removes some future appreciation from your estate.
You need to remember, however, that you should not give away anything that you can't afford. You don't want to be going to your kids in a few years asking for a loan.
A helpful tip, Susan. Thanks.
Kiplinger does believe that Congress will keep the thresholds and the estate tax the same next year. But the threshold could decline to $3.5 million, and the tax could go to 45%.
Susan, you mentioned appreciated stock. How can people decide what types of assets to give away? Does it make more sense to give cash, appreciated stock, other assets, etc.?
Cash might seem like the simplest asset to give. But in many cases, it can make more sense to give appreciated stock. That way, you avoid paying capital gains tax on sale of the shares. And if the stock is expected to appreciate significantly in years to come, you also get the future growth out of your estate.
When you're thinking about what type of assets to give away, remember that a lot of charitable organizations are now making it easier to give away illiquid assets like art or antiques. That lets you hang on to the cash and other liquid assets you need for your living expenses.
Great. Thanks, Eleanor. Something to keep in mind.
It's worth pointing out that low interest rates make some gifting strategies more attractive, too. For instance, it's likely that assets in a charitable lead trust could easily grow more than the IRS's expected rate, and the excess growth can be passed to beneficiaries free of estate and gift taxes.
Thanks, Rachel -- a benefit of rock bottom interest rates.
Another point on giving away appreciated stocks: If you're giving to your children or other non-charity people, the person who gets the gift will get the giver's "basis" --that is, the value of the stock when the giver first bought it. If the kids sell the stock, they will owe long-term capital gains tax on the difference between the value when you bought it and the value when they sold it.
Thanks, Susan. I was going to ask about that. How does this relate to the "kiddie tax?"
Taxpayers have to be careful when giving gifts of stock to kids. Children under 18 and full-time students under 24 are subject to the "kiddie tax." That means their investment income over a certain threshold -- $1,900 -- will be taxed at the parent's higher income tax rate.
On the other hand, if you have an older child who's out of reach of the kiddie tax but still qualifies for the 0% capital gains tax rate (available to people in the 10% or 15% income tax bracket), transferring appreciated stock to that child before year-end might be a great idea.
That's a great point, Eleanor. Particularly because the 0% capital gains rate is set to expire.
Alright, let's go ahead and take our first question. This one comes from Nate
On itemized deductions, one new limit we will see is on deductions for medical expenses. This year, you can claim a deduction for medical expenses that exceed 7.5% of adjusted gross income. Next year, as part of the new health care law, the threshold rises to 10% for those under 65. Those 65 and older will be able to continue to use the 7.5% through the 2016 tax year.
More on itemized deductions--next year, higher earners will lose unlimited itemized deductions. The limitations will shrink the value of certain itemized deductions for joint filers with incomes of more than $174,450 (singles, $87,225). This is separate from any discussion on Capital Hill on the fiscal cliff regarding proposals to limit deductions for all taxpayers. Who knows what will happen with that?
Also, in 2013, higher income taxpayers may be subject to the revival of the personal exemption phaseout, which can reduce the deduction for personal exemptions starting at AGI of about $267,000 for joint filers.
Too bad we don't have a crystal ball!
Alright, ready for our next question from Mister M?
Mister M, your estate will owe federal and possibly state estate tax for whichever year you die. So if you were to pass away in 2012, your estate would owe no federal estate tax if your taxable estate was less than $5.12 million. Next year, the federal estate tax exclusion is scheduled to drop to $1 million. So if you die next year and your taxable estate is worth more than $1 million, your estate might get hit with a tax bill if that exclusion does drop as scheduled.
Thanks, Rachel. We actually have a question about the federal estate tax exclusion. I will follow up with that in a minute.
If you're talking about the gift tax exemption, there is talk on Capital Hill about grandfathering in bigger gifts made during the past two years when the gift tax was "unified" with the higher estate tax exemption. There is a lot of dust that will have to settle before all this becomes clear.
I think we'll all be relieved once we don't have to deal with so much uncertainty!
Just to note: a taxpayer can give up to $13,000 this year to any number of individuals without having to worry about filing a gift tax return. Couples can give $26,000. The amount rises to $14,000 ($28,000) in 2013. However, you can pay a grandchild's college or secondary school tuition, for example, without incurring any gift tax or estate tax repercussions.
Thanks for pointing that out, Susan. That's actually a good segue into Shirley's question.
Shirley, yes, if you are giving more than $13,000 to one individual this year, you need to file a gift-tax return. But you don't have to worry about any taxes on it now. Your estate might owe gift tax in the future, but only if you exceed the lifetime exemption.
You can however make gifts of up to $13,000 per person to an unlimited number of individuals in 2012.
To follow up on Rachel, every dollar you give above $13,000 goes toward your lifetime gift tax exclusion. Until last year, the exclusion was $1 million, which was deducted at your death from your estate tax threshold. This year, you can give $5.12 million in gifts above the $13,000. That $5.12 million is the total for allowable gifts and estate.
