By: Alan B. Peck
FEDERAL ESTATE TAXES
Last year Congress made significant changes to Federal tax law, including some relating to Federal estate taxes. As a result, not many Americans will have to worry about paying any federal estate taxes.
You must have assets worth more than $11,000,000.00 (to be exact, more than $11,200,000.00), before you need to be concerned about Federal estate taxes.
Just how much of a cut the federal government will get now depends on how much you leave your heirs. If your final assets are less than a certain amount that is annually adjusted for inflation, then there is no estate tax issue.
For the 2018 tax year, if you die and leave assets of more than $11,200,000.00, the amount over that exemption figure could be subject to a Federal estate tax of 40%. The Federal estate tax exemption for 2018 is a significant increase over the 2017 amount of $5,490,000.00 and the exemption amount applies to each person individually, so a married couple will be able to leave $22,400,000.00 to their heirs and not pay any Federal estate taxes.
TAX FREE GIFTS
In addition to the estate tax exemption, individuals also have the option to take advantage of tax-free gifts before they die to help keep their total assets below the estate tax limit. This is a valuable option for two reasons. First, it can help reduce your estate to keep it under the level where the estate tax kicks in. Second, and even better, you’ll be around to get “thank yous” from your gift recipients.
The annual gift tax “exclusion” for gifts made in 2018 is $15,000.00, up from $14,000.00 for the last several years. You can give up to the gift tax exclusion limit, either in cash or in asset value at that amount, to as many people, not just relatives, as you wish. The gift tax exclusion amount applies per person meaning spouses can each give $15,000.00 gifts so a couple, combined, could give a child a total of $30,000.00 without any gift tax consequences.
The gift tax is only levied at the Federal level. There is no Kentucky state gift tax.
LIFETIME FEDERAL GIFT TAX EXEMPTIONS
As long as you stay at, or under, the annual gift tax exclusion amount ($15,000.00 per recipient per year), your gifts will not count toward another Federal gift tax limit - the Federal lifetime gift tax “exemption”. As the name indicates, the lifetime Federal gift exemption is the total amount of gifts that can be given away tax-free by a person over his or her lifetime to any number of people.
The lifetime gift tax exemption amount is pretty generous. It is the same as the Federal estate tax exemption of $11,200,000.00 per person in 2018, up from $5,490,000.00 in 2017. If, however, you happen to go over the lifetime gift tax exemption amount, you will owe a 40% tax on the gifts exceeding the lifetime gift tax exemption amount.
KENTUCKY INHERITANCE AND ESTATE TAXES
Kentucky inheritance and estate tax law has not changed for some time.
Although it now doesn’t apply to many people, Kentucky is one of the few remaining states which still has an inheritance tax that is imposed based on the amount an individual inherits from a deceased person.
However, spouses, children, grandchildren, parents, brothers and sisters are exempt from Kentucky inheritance taxes no matter how large the inheritance is. All others, including aunts, uncles, nieces and nephews and those unrelated to the deceased person are subject to the tax.
Kentucky, much to the surprise to many people, also has an estate tax in addition to the inheritance tax. The good news is it doesn’t apply to many estates. The Kentucky estate tax is only levied when the credit for death taxes allowable on Federal Estate Tax Return (if one is required to be filed) exceeds the Kentucky inheritance tax payable by the estate.
Although not specifically tied to estate or gift taxes, young children are often recipients of financial gifts. Parents and grandparents give minor children investment assets as ways to provide support for future goals and to teach the kids about money management. However, successful investments could carry a tax cost for young persons.
The so-called “kiddie tax” comes into play when young people (up to age 23, if a full-time student) have unearned income that exceeds limits that are set annually based on inflation.
The new”Kiddie Tax” law is simpler than the old one. A child with only earned income (generally just wages and salary) must file a separate return if gross income exceeds the $12,000.00 standard deduction for a single taxpayer. A child with only investment income (interest, dividends and capital gains) must file a separate return if gross income is more than $1,050.00. A child with both earned and unearned income must file if the total amount exceeds the greater of $1,050.00 or the earned income plus $350.00.
How is the new kiddie tax simpler than the old one? First the child’s net unearned income is no longer added to the parent’s taxable income to determine the incremental tax liability, which was then allocated to the child’s tax return- and taxed at the parent’s marginal rate. This separation from the parent’s return is more beneficial when there is more than one child with unearned income.
The second reason it is simpler is the tax on each child’s net unearned income is simply calculated using tax brackets applicable to trusts and estates.
Whether the new kiddie tax law’s approach for taxing the net unearned income of children produces a larger or smaller tax bill will depend on the family’s tax situation and the type of unearned income of the child. However it should mean lower taxes for children with a modest amount of interest, dividends and capital gains unearned income.
Whether you are planning eventual resolution of your estate or simply focusing now on a youngster’s investment income, be sure to keep an eye on the inflation changes. They could affect your asset and tax decisions.
To learn more about how estate, gift and inheritance taxes will impact Kentuckians in 2018, and beyond, contact our estate planning attorneys. White Peck Carrington, LLP is a law firm in Mt. Sterling delivering expertise in the areas of estate planning, elder law, probate and business law. Call us at (859) 498-2872 for an appointment to discuss the above, or other, matters.