Archives for December 2014

A reader writes in, asking:

“How much can I give per year without having to pay any tax? I read in one place that it’s $14,000 and in another place that it’s over $5 million.”

First, a quick point of clarification for any readers new to the topic: The recipient of a gift does not have to pay tax on it. It is only the person giving the gift who has to worry about the gift tax.

Excluded Gifts

None of the following types of transfers are subject to the gift tax:

• Gifts to your spouse,
• Gifts to a qualifying charity,
• Gifts to a political organization for its use, and
• Payments made directly to an educational institution or health care provider to pay for somebody else’s tuition or medical expenses.

In other words, you can give away as much money as you want in any of the above ways, without having to worry about gift tax.

Annual Gift Tax Exclusion

For gifts that don’t fall under any of the above exclusions, you can still give (for 2014 and 2015) up to $14,000 per year without the gift being taxable.

A key point here is that this annual exclusion is per donor, per recipient. In other words, you can give up to $14,000 per year to as many different people as you’d like, without ever exceeding the annual exclusion. And if you’re married, your spouse could also give up to $14,000 to each of those same people without ever exceeding the annual exclusion.*

Lifetime Exclusion

So what happens once you exceed the annual exclusion amount? You’ll have to file Form 709 to report the taxable gift, but in most cases you still won’t have to pay any gift tax. That’s because, after exhausting your annual exclusion, you then have to exhaust your lifetime exclusion before you actually have to pay any gift tax.

For example, if you give $40,000 to your brother in 2015, you will have made a taxable gift of $26,000 (that is, $40,000 minus the $14,000 annual exclusion). This $26,000 amount will come out of your lifetime exclusion.

As of 2014, the lifetime exclusion is $5.34 million (and twice that for married couples). For 2015, the amount is $5.43 million (and twice that for married couples). As you might imagine, most people never have to pay any gift tax, because they never even come close to exceeding their lifetime exclusion.

Of note: The lifetime exclusion is a shared exclusion with the estate tax. (The overall purpose of the gift tax, by the way, is to eliminate the possibility of people simply gifting their assets to their heirs before they die, in order to avoid the estate tax. So a shared exclusion makes sense.) In other words, by making a taxable gift, you reduce the amount that can be left to your heirs before the estate tax kicks in.

*Spouses are also allowed to elect (on Form 706) to have gifts treated as if they were given 50/50 by each spouse. This would be helpful, if, for instance, you have a $20,000 piece of property that you want to give to somebody. If only one spouse gives it (and no special election is made), then there’s a $6,000 taxable gift (assuming a $14,000 annual exclusion). But if a gift-splitting election is made, there would be no taxable gift because a total $28,000 annual exclusion would be available.

Typically, I do a tax update near the end of the year to discuss any significant changes that will be applicable for the following year. For 2015, the big news is that there is no news. Whereas 2014 had the new Premium Tax Credit and 2013 had several new provisions (e.g., the new 39.6% tax bracket, the 20% tax rate on qualified dividends and long-term capital gains for people in that new tax bracket, and the new 3.8% tax on net investment income), 2015 doesn’t have much that’s entirely new. For the most part, it’s just inflation adjustments.

The tax brackets for 2015 are as follows:

Single 2015 Tax Brackets

Married Filing Jointly 2015 Tax Brackets

Head of Household 2015 Tax Brackets

Married Filing Separately 2015 Tax Brackets

Standard Deduction Amounts

Due to inflation adjustments, the 2015 standard deduction amounts will be as follows:

• Single or married filing separately: $6,300
• Married filing jointly: $12,600
• Head of household: $9,250

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,250 for married taxpayers or $1,550 for unmarried taxpayers.

Personal Exemption Amount and Phaseout

The personal exemption amount for 2015 is a nice round $4,000.

However, the total personal exemptions to which you’re entitled will be phased out (i.e., reduced and eventually eliminated) as your adjusted gross income (i.e., the last line of the first page of your Form 1040) moves through a certain range.

• For single taxpayers, personal exemptions begin to be phased out at $258,250 and are fully phased out by $380,750.
• For married taxpayers filing jointly, personal exemptions begin to be phased out at $309,900 and are fully phased out by $432,400.
• For taxpayers filing as head of household, personal exemptions begin to be phased out at $284,050 and are fully phased out by $406,550.
• For married taxpayers filing separately, personal exemptions begin to be phased out at $154,950 and are fully phased out by $216,200.

Limitation on Itemized Deductions

As in 2013 and 2014, the amount of itemized deductions which you are allowed to claim is reduced by 3% of the amount by which your adjusted gross income exceeds certain threshold amounts. These threshold amounts are the same as the lower threshold amounts listed above for the personal exemption phaseout (e.g., $258,250 for single taxpayers). However:

1. Your itemized deductions cannot be reduced by more than 80% as a result of this limitation, and
2. Your itemized deductions for medical expenses, investment interest expense, casualty/theft losses, and gambling losses are not reduced as a result of this limitation.

IRA and 401(k) Contribution Limits

For 2015, the contribution limit to Roth and traditional IRAs is unchanged at $5,500, with an additional catch-up contribution of $1,000 for people age 50 or older.

The contribution limit for 401(k), 403(b), and most 457 plans, however, is increased to $18,000, with an additional catch-up contribution of $6,000 for people age 50 or older.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a SEP IRA) is increased from $52,000 to $53,000.

AMT Exemption Amount

After adjusting for inflation, the following are the AMT exemptions for 2015:

• $53,600 for single taxpayers,
• $83,400 for married taxpayers filing jointly, and
• $41,700 for married taxpayers filing separately.

“Shared Responsibility Payment” (Penalty for No Health Insurance)

Perhaps the biggest change for individual income tax is that the calculation of the penalty for having no health insurance is changing (according to schedule) for 2015. In short, the penalty is bigger than it would have been in 2014. (And it will be bigger still in 2016 and beyond.) Healthcare.gov has the details of the calculation here.