JANUARY 12, 2015 VOLUME 22 NUMBER 2
Welcome to 2015! Who thought we’d ever make it?
The Internal Revenue Service did, that’s who. They’ve busily updated numbers for the upcoming year; most of the new numbers have actually been known for a couple months. Once you get used to writing “2015” every time, we have some other new numbers for you to memorize.
Estate tax threshold: The federal estate tax kick-in figure rises to $5.43 million for people who die in 2015. Somewhat confusingly, that is an increase from the $5.34 million figure applicable for deaths in 2014, so don’t assume that the new figure is just a transposition typo when you see it next. Of course, married couples now have a total of twice the new figure (or $10.86 million) to pass without federal estate tax — if they both die in 2015, that is.
Keep in mind that some states still impose an estate tax of their own. They might or might not increase the minimum figure with inflation (most don’t), so if you live in one of those states, or own property in one of those states, you also need to think about the state estate tax limit.
Also remember that the federal $5.43 million figure is reduced for taxable gifts you have made in past years. We’ll talk a little about gift taxes next.
Federal gift tax threshold: You don’t have to pay any federal gift tax until taxable gifts reach a lifetime total of $5.43 million — the same figure as the estate tax threshold. But gifts are even more favorably treated, since the first $14,000 you give to each recipient avoids taxation, filing or any other restriction. That $14,000 figure is the same as last year — it did not increase at all for 2015. Why not? Because, though it is indexed for inflation (and will rise in the next couple years) it only goes up in $1,000 increments. This year’s increase was not enough to cross the $1,000 notch.
You may already know that married people can pretty easily double the $14,000 gift figure. But you might not realize that it’s actually a little harder than most people think. If you and your spouse make a joint gift (if, say, the gift is from a joint account), you have nothing to file and no federal tax effect for the first $28,000 received by a given recipient. But if you write the check on your own separate account, you have to file a gift tax return (and your spouse has to sign it) in order to ignore the excess over your $14,000 gift. Confusing? Talk to your lawyer and accountant about the specifics.
This gives us a chance to mention a common misunderstanding, by the way. Again and again we hear clients say that they are limited to the $14,000 figure for gifts. That is incorrect. If our client says “oh, I knew that: I meant that I can’t give away more than $14,000 without paying a tax,” they are still wrong. It can be a little bit complicated to explain, but here’s how gift-giving works:
- If you give away more than $14,000 (twice that for a married couple) to a single recipient, you are required to file a gift tax return.
- When you do file your gift tax return, you only pay gift taxes on the amount by which your lifetime gifts exceed the $5.43 million figure (for 2015). In other words, if you have never owned more than $5.43 million in assets, you will have a very, very hard time incurring a federal gift tax, no matter what you do. You will also have a very, very hard time incurring a federal estate tax.
- If there is a tax on the gift, it is paid by the giver, not the recipient. Gifts are not deductible from your income tax, and they are not income to the recipient. The only federal tax associated with a gift is the federal gift tax, and it only kicks in after millions of dollars of total gifts.
- Married? Both the annual ($14,000) figure and the maximum lifetime gift ($5.43 million) figure are probably doubled.
Bottom line: only people who are both very wealthy and very generous need to worry about actually paying a gift tax. The real worry is about incurring the cost of filing a gift tax return — and that doesn’t kick in until that $14,000/$28,000 figure is reached.
Income tax rates: The basic chart of federal income tax rates is the same as in 2014, but with new figures for the bracket changes. In other words, in 2014 a married couple filing a joint return paid the lowest tax rate (10%) on the first $18,150 of taxable income. For 2015 that first-step threshold increases to $18,450 (a $300 increase). And the top bracket (39.6%) kicks in at a combined income of $464,850 this year, rather than the 2014 figure of $457,600.
Personal exemption and standard deduction: These two separate figures add up to an important principle for low-income taxpayers: if you don’t earn more than the combination of these two figures, you can’t be liable for any federal income tax. The personal exemption reduces your income before we even get to looking at your deductions. The standard deduction is the minimum amount that everyone gets to deduct from income before figuring out their tax liability, even if they don’t itemize deductions.
Both figures increase for 2015, but the increases are small. The personal exemption (you may get more than one, depending on marital status, age and other factors) will increase by a mere $50, to $4,000. For a married couple filing jointly, the standard deduction goes up by another $200. What does that mean for real taxpayers? If you are married filing jointly, and have just two exemptions available (and no dependent children), you don’t have to file at all unless your income exceeds $20,600 ($23,100 if you are both 65 or older).
One other “change” to mention: Last year a special tax opportunity expired. In 2013, if you had to take a minimum distribution from your IRA or 401(k), you could instead direct it to your favorite charity and avoid having to pay tax on it at all. Why was that valuable? Because even if you received the income and then gave it to charity, your charitable deduction wouldn’t cover every dollar of the gift. With this special authority, you really could avoid income tax on the distribution.
But wait! At the eleventh hour (actually, the twelfth hour) Congress brought back the 2013 deduction for 2014 — but not for 2015. So this change helps people who assumed that it would be extended, but doesn’t help anyone who tries to do the same thing in 2015. Unless, of course, Congress re-extends the authority later this year.