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Gift Tax Limits Update for 2017 and 2018

11.2.17

Gift Tax Limits Update for 2017 and 2018

“Gift Tax Limits Update for 2017 and 2018” by Ann Miller, CPA | Manager – Tax Ann Miller head shot

As we near the close of 2017, now is the time to make any last minute gifts in order to fully use the annual gift tax limits exclusion for 2017.

The annual gift tax exclusion amount available for a gift made to an individual either directly or indirectly without filing a gift tax return is $14,000. However, good news for 2018, it is increased to $15,000. It has been several years since there has been an increase.

Lifetime Exclusion and Portability

Also, if gifts are made in excess of the annual exclusion, there is a lifetime exclusion that also applies. The unified estate and gift tax lifetime exclusion amount is $5,490,000 for 2017. This amount also increases for 2018 to $5,600,000. For married couples, the rules of portability apply. Portability allows the surviving spouse to use the deceased spouse’s unused estate tax exclusion in addition to their lifetime gift and estate exclusion.

It is important to note though, that when the first spouse dies and their estate is below the lifetime exclusion and thus there would be no estate tax due, an estate tax return is required to be filed timely to in order to make the portability election. This concept effectively gives a married couple the ability to pass on to their heirs free from federal estate taxes $10,980,000 for 2017 or $11,200,000 for 2018.

Trump Tax Reform and the Estate Tax

As you probably have heard in the news recently, Trump’s comprehensive tax reform has a provision in it to repeal the estate tax.

There are questions if this will actually go through as they negotiate the tax reform proposal as there may be need to keep the estate tax in some form in order to make this tax package revenue neutral. So at this time it is best to keep up with any estate planning that has already been put in place or in process.

Other Year-End Planning Ideas: Qualified Charitable Distribution from an IRA

As we near the close of 2017, now is the time to make any last minute gifts in order to fully use the annual gift tax limits exclusion for 2017. 

Another year-end planning idea is doing a tax-free qualified charitable distribution directly from an IRA.

Taxpayers age 70 ½ and older must take required minimum distributions (RMD) from their IRA’s before the end of the year. One way to reduce the tax burden of this distribution is to directly transfer the RMD to a qualified charity up to $100,000. When this is done, the distribution is not included in income on page 1 of the Form 1040 and since the income is not included, there is not a charitable deduction for the transfer to the charity on Schedule A of Form 1040.

A few items to note is that the distribution must be made directly from the IRA to the charity and the charity must be a qualifying charity, this does not include a private foundation or a donor advised fund. Also for a married couple, if both spouses have an IRA with a RMD requirement, both can do the qualified charitable distribution up to $100,000 each. Currently, this is a permanent element of the tax law.

Benefits of the Qualified Charitable Distribution

This tax planning strategy helps in reducing adjusted gross income (AGI), which is a benchmark for various other tax calculations. As most states start with federal adjusted gross income in their tax calculations, this would reduce state taxes as the RMD would not be included in income for state purposes.

Also various itemized deductions are only allowed if they are in excess of a certain percentage of AGI, thus having a lower AGI would allow more certain itemized deductions. The net investment income tax is also based on a certain level of AGI. Here again having a lower AGI would help in reducing or eliminating the net investment income tax.

The qualified charitable distribution should be received by the charity by December 31st, so it would be a good idea to get this process started by mid-December.

There are multiple year-end tax planning strategies. If you have questions about these planning ideas, or would like to set up a year-end tax planning meeting, contact your trusted advisor at 330.867.7350.