As we near the close of 2018, now is the time to make any last-minute gifts in order to fully use the annual gift tax exclusion for 2018.
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 $15,000. The amount for 2019 has not been released yet, but it is expected to remain at $15,000.
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 $11,180,000 for 2018. This amount will be indexed for inflation till the year 2025 and is scheduled to go back to approximately $6,000,000 effective 1/1/2026. For married couples, the rules of portability still 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 $22,360,000 from 2018 till 2025.
With this increase in the lifetime exclusion, it is still important to review your estate plan as the exclusion amount is scheduled to revert to a lower level and gifting now could “lock-In” the current exclusion thus permanently avoiding future transfer taxes. Existing estate plans should be reviewed to ensure that the change in exclusion amount does not negate or disrupt your initial estate plan and use of trusts. State estate taxes are another consideration. Ohio does not currently have an estate tax, but neighboring states such as Pennsylvania, Kentucky, and New York still do.
Other Year-End Planning Ideas: Qualified Charitable Distribution from an IRA
Another year-end planning idea is the plan of 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. This tax free transfer was made permanent.
A few items to note is that the distribution must be make 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.
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.
This also benefits middle to lower income taxpayers. Due to the increase in the standard deduction, more tax filers will not have enough to itemize, thus the use of an IRA RMD directly to a charity would still give you a tax benefit.
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 me to get started.