iThe American Taxpayer Relief Act of 2012 made permanent the higher estate and gift tax exclusions, and annual inflation adjustments to those exclusions. Therefore, we all now can count on annual changes to the relevant tax thresholds under the estate and gift tax laws. The following is a summary of the federal law changes, and some important state law changes in 2015.
Estate Tax
The federal estate tax exemption has increased from $5.34 million in 2014, to $5.43 million in 2015. This means that a married couple may shield up to $10.86 million from federal estate tax during their lifetimes and at death. The maximum estate tax rate continues to be 40%.
In addition, there have been changes in state estate tax laws for 2015. New York passed legislation in 2014 that will increase the exemption each year until it equals the federal exemption in 2019. On April 1, 2015, the exemption will increase to $3.125 million. However, estates that exceed 105% of the exemption amount will not receive the benefit of the exemption. As a result, estates greater than $3,281,250 will not receive the benefit of the exemption in 2015. The maximum estate tax rate (for estates exceeding $10 million) remains at 16%. Further, New York previously did not have a gift tax, but under the new law, gifts made within three years of death will be included in the decedent’s taxable estate. Gifts are only included if the decedent made them between April 1, 2014 and January 1, 2019 while he or she was a resident of New York. The new law, however, does eliminate New York’s generation-skipping transfer tax, which was previously assessed at the rate of 16%.
In Hawaii, the exemption has increased to $5.43 million (the same as the federal estate tax exemption). In Illinois, the exemption continues to be $4 million. California, Georgia, and Florida continue to have no state estate tax in 2015.
Gift Tax
The federal gift tax exemption has also increased from $5.34 million to $5.43 million. Thus, a married couple may make lifetime gifts having a value of $10.86 million without incurring any federal gift tax. The maximum gift tax rate is still 40%.
The federal gift tax annual exclusion amount for 2015 continues to be $14,000. This means that a married couple may make gifts in 2015 having a value of up to $28,000 per recipient without incurring any federal gift tax. The federal gift tax annual exclusion also is indexed to inflation but in $1,000 minimum increments. This usually means there are several years between adjustments.
The federal estate and gift taxes continue to be unified and have the same exemption amounts and tax rates. This means that at death, the estate tax exclusion is effectively reduced by any exclusion previously used to make lifetime gifts.
Generation-Skipping Transfer (GST) Tax
The federal GST tax is a tax assessed on transfers during lifetime or at death to or for the benefit of grandchildren or more remote descendants. This tax is in addition to any gift or estate tax that may apply.
The GST exemption has also increased from $5.34 million to $5.43 million, which means that a married couple may shield up to $10.86 million from GST tax during their lifetimes and at death. The maximum GST tax rate continues to be 40%.
Tax on Net Investment Income
A 3.8% net investment income tax continues to be imposed on the unearned income of individuals, estates, and trusts that have income above $250,000 (for married couples filing jointly), $200,000 (for single taxpayers), and, for 2015, $12,300 (for estates and trusts). Unearned income includes income from interest, dividends, non-qualified annuities, royalties, rents, capital gains, and other passive income.
Conclusion
Federal and state estate and gift tax laws currently seem to be relatively stable as compared to 2010 and years prior. However, as Congress and many states look for tax law changes to raise revenue, care should be taken to understand the current status of these laws and to monitor for potential changes.
