When most people hear about estate tax planning, they assume it is only for the wealthiest taxpayers. Recent changes in the estate tax laws, however, have been so advantageous to those passing wealth to another generation that it is worth knowing about them to ensure that you make the most of them as possible. Crucial aspects of these laws are set to expire in 2013, so find out about them now, says the Pennsylvania Institute of Certified Public Accountants (PICPA).
Find Out Where You Stand
Despite the ups and downs in the stock and real estate markets in recent years, many people may be surprised to find how much value they have built up in home equity and in their retirement and investment accounts. If you’re not certain about the value of what you own and how to calculate your net worth, your CPA can help. What you learn could have a significant impact on your estate planning, as well as other critical financial decisions.
Consider Gift Giving Options
If you find that you’re in a position to share some of your wealth with other family members, your first step should be to update or write a will. In addition to thinking about estate planning, you should be aware that you are allowed to give a tax-free gift of up to $13,000 to another individual every year. In the past, you could give a lifetime total of only $1 million tax free, but through 2012 that lifetime total has been raised to $5 million for individuals and $10 million for couples (adjusted for inflation). Congress may pass new laws that change the situation, but, for now,
that $5 million exemption for individuals is set to drop back to $1 million in 2013.
Look into the Estate Tax Exemption
Because of the estate tax exemption, through the end of this year individuals will not have to pay taxes on an inheritance that is worth up to $5 million. Next year, the estate tax exemption also will drop to $1 million. In addition, the tax on gifts or an inheritance over $5 million is 35 percent this year, but it is set to jump to 55 percent in 2013.
Another advantage in place during 2012 is “portability.” Let’s say a husband dies and leaves an estate worth $2 million. Since he did not use up his entire $5 million estate tax exemption, his spouse’s estate is now eligible to use the $3 million of
exemption that is left, giving her a total $8 million estate tax exemption. Portability will also affect the surviving spouse’s gift tax exemption. Under current law, portability is only available if both spouses pass away during 2011 or 2012,
but laws do change. Check in with your CPA if you believe you may be affected.
Don’t Forget State Taxes
Before you rush to give a substantial gift or assume that your new inheritance will be tax free, keep in mind that some states have their own separate estate taxes. In Pennsylvania, for example, gifts of over $3,000 made within one year of the giver’s passing are considered taxable.
Turn to Your CPA
Estate taxes are a complicated business, and because of changing tax laws, timing can be a crucial element. Your local CPA can help. Consult him or her with all your financial questions. To find a CPA in your region or by area of expertise, visit
The CommonWealth Tips columns are a joint effort of the AICPA and the Pennsylvania Institute of Certified Public Accountants (PICPA), as part of the profession’s nationwide 360 Degrees of Financial Literacy program.
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