As a result of the passage of the new tax relief measure at the end of last year the lifetime gift tax exemption was raised from $1 million to $5 million and the rate of the tax was reduced to 35%. This brings it in line with the estate tax with which it is again unified. What this “unification” means to you is that between gifts and your estate you can pass along a total of $5 million before you are taxed.
There are however some additional gift tax exemptions that can be used to great advantage as a way to bring the value of your estate under the estate tax exclusion amount. For one, each taxpayer is entitled to give gifts equaling as much as $13,000 to an unlimited number of recipients. These gifts. no matter how many, are free of gift tax each year, and these gifts do not impact the lifetime unified exclusion discussed above.
In addition, there is an educational gift tax exemption. You can pay the tuition of students without incurring any gift tax liability, but you do have to make the payments directly to the institution and not the student. This is a tuition-only exemption so you can’t pay for books, fees, and living expenses as a tax-free gift using the educational exemption. But you could use the $13,000 annual exemption to address these other costs. If you are married you and your spouse could give as much as $26,000 per year to a given individual.
You can also pay the medical bills for others totally free of the gift tax, and this includes the payment of health care insurance premiums. So when you combine these three different forms of tax-free gift giving in an intelligent manner utilizing sufficient foresight you can facilitate the tax-free transfer of assets to your loved ones while you’re still alive and reduce the taxable value of your estate in the process.
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