We are fast approaching a darker tax climate in 2013 for investment income and gains. As we have been writing, higher-income taxpayers will face a 3.8% surtax on their investment income and gains. Additionally, if the Bush Tax Cuts expire, all taxpayers will face higher taxes on investment income and gains, and the vast majority of taxpayers will face higher rates on their ordinary income. Additionally, unless Congress acts estate and gift taxes will increase.
To combat this income tax uncertaintity, it would make sense to at least entertain, year-end gifts to family members which may yield even greater family tax savings than in prior years.
The first $13,000 of gifts ($26,000 for married couples who split gifts) made by a donor to each donee in calendar year 2012 is excluded from the amount of the donor’s taxable gifts. The gift tax exclusion is over $5 million dollars this year (set to sunset at the end of 2012) which would allow us to transfer signficiat propertly without a tax implication. These exclusions can save both transfer tax for the donor and family income taxes and surtaxes. The transfer is free of gift tax. Estate tax can be saved because both the value of the gift on the date of transfer and post-transfer appreciation (if any) in the value of the gift are not included in the donor’s estate.
Family income tax savings can be realized where income-earning property is given to family members in lower income tax brackets. The 3.8% surtax can be saved if the transferred property is of a type that generates income that would be subject to the surtax in the donor’s hands but won’t be subject to the surtax in the donee’s hands.
Remember that these transfers need to take place by no later than Dec. 31 to take complete advantage of the annual exclusions. Unused annual exclusions can’t be carried over and are forever lost.
If you have any questions regarding transferring assets to family members or the tax implication or benefit, please do not