How to Maximize Your Annual Gifts and Minimize Your Estate Taxes

Annual Exclusion

Taxpayers are allowed to gift up to $13,000 per year to an unlimited number of people without having to file a gift tax return or pay a gift tax. If the amount goes over $13,000 to any one individual, then a gift tax return must be filed. This is done on IRS Form 709, United States Gift Tax Return. Connecticut taxpayers required to file a federal gift tax return would be required to file Form CT-706/709. The returns are due on April 15. A six month extension of time is granted automatically if an extension of time to file is requested for your individual income tax return. This is done on Form 4868. Taxable gifts above the annual exclusion reduce the federal estate tax exclusion amount when someone passes away. There are a few additional opportunities to gift beyond the annual exclusion without having to file a gift tax return.

Additional Exclusions

In addition to the annual exclusion mention above, there is a limited exclusion for certain education and medical expenses paid. Qualifying educational or medical expenses paid directly to the educational institution or the medical provider do not require that a gift tax return be filed or a gift tax paid. Educational expenses are limited to tuition. Room and board, books and other fees are not eligible for this exclusion. Qualifying medical expenses include allowable deductible medical expenses that aren’t reimbursed by insurance. The key to obtaining this additional exclusion is for the donor to pay the educational institution or the medical provider directly. Only payments that are paid from the donor directly to the provider will qualify for this additional exclusion. Checks payable to the children or grandchildren to reimburse them for these expenses won’t qualify. These gifts would not be eligible for this additional exclusion and would be subject to the gift tax rules accordingly.

Estate Tax

The federal estate tax exclusion for 2012 is $5.12 million dollars. It was $5 million for 2011, it was increased slightly to account for inflation. The federal estate tax rate for 2012 is 35%. If Congress does not make any changes however, in 2013 the exclusion will drop to $1 million and the tax rate will increase to 55%. The State of Connecticut estate tax exclusion is only $2 million. The rate starts at 7.2% for taxable estates over $2 million and goes up to 12% on estates over $10.1 million.

ACTION ITEM: Taxpayers need to understand how they can maximize their annual gifts and minimize their estate taxes.

Thomas F. Scanlon, CPA, CFP®

Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

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