Estate and Gift Tax Exemptions Updated for 2016

One last bit of updating from the IRS for 2016, dealing with estate and gifting exemption maximums. It looks like you can pass on a little bit more to your heirs tax-free starting next year: estate and gift tax exemptions have been increased to $5.45 million per person (up from $5.43 million in 2015). The article below from Forbes provides a good summary, especially touching on “portability,” which helps to maximize the amount a married couple can pass to beneficiaries tax-free.

The annual gift tax exclusion amount (the amount one can give to a person during the year without having to report the gift for tax purposes) remains at $14,000.


By Ashlea Ebeling

It’s official—for 2016, the estate and gift tax exemption is $5.45 million per individual, up from $5.43 million in 2015. That means an individual can leave $5.45 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield $10.9 million from federal estate and gift taxes.

The estate tax exemption was as low as $2 million in 2008, $1 million in 2003 and $675,000 in 2001. The estate and gift tax exemption amount was set at $5 million in 2011, indexed for inflation. The top federal estate tax rate is 40%.

The federal gift tax is tied to the estate tax, so the inflation indexing helps the wealthy make the most of tax-free lifetime giving too. You can make the gifts during your lifetime; you just have to keep track of them as they count against the eventual estate tax exemption amount. So a woman who set up a trust for her kids with $5 million a few years ago could make new gifts to add to the trust and bring it up to the $5.45 million amount.

Don’t let the $10.9 million number fool you. The rules for couples are tricky. Sure a husband and wife can each get their own exemption, meaning a couple will be able to give away $10.9 million tax-free in 2016 (assuming they haven’t made prior lifetime gifts), but it’s not automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. But to use your late spouse’s unused exemption – a move called “portability”—you have to elect it on the estate tax return of the first spouse to die, even when no tax is due. The problem is if you don’t know what portability is and how to elect it, you could be hit with a surprise federal estate tax bill.

Totally separate from the lifetime gift exemption amount is the annual gift tax exclusion amount. It’s $14,000 for 2016, the same as 2015 and 2014, up from $13,000 a year in 2013. You can give away $14,000 to as many individuals as you’d like. A husband and wife can each make $14,000 gifts. So a couple could make $14,000 gifts to each of their four grandchildren, for a total of $112,000. The annual exclusion gifts don’t count towards the lifetime gift exemption.

When you’re making gifts to children and grandchildren, keep in mind that there’s a federal kiddie tax that covers students through the age of 23 and puts investment income, above small amounts, into the parents’ tax bracket. For 2016, the kid pays no tax on the first $1,050 of unearned income and then 10% rate on the next $1,050, the same as in 2015.

If you want to make gifts and not have to bother to keep track for gift tax purposes, you can make gifts for medical, dental, and tuition expenses for as many relatives (or friends) as you’d like so long as you pay the provider directly. These gifts don’t count towards any of the limits.