Saving Money Category
Dear Liz: My husband and I have given our daughters gifts over the years, but we have never exceeded the $26,000 gift tax limit for a married couple. Do we need to file IRS Form 709 to split the gifts? If so, how to do we file for past years?
Answer: The gift tax system exists to help prevent wealthy people from transferring large amounts to their heirs during the donors’ lifetimes in an attempt to avoid estate taxes. Each person, however, is allowed to give a certain amount each year to any number of recipients.
The current gift tax exemption is $13,000. Each of you could give each of your daughters $13,000 annually. That means the two of you could give the two of them a total of $52,000 a year without having to file a gift tax return. Tuition or medical expenses you pay directly on behalf of another person do not count toward the limit.
The $13,000-per-recipient limit has been in place since Jan. 1, 2009. The limit was $12,000 from 2006 to 2008 and $11,000 from 2002 to 2005.
Only if donors give more than the annual exemption amount are they required to file gift tax returns. Even then, the givers typically don’t owe gift taxes. The lifetime gift tax exemption is currently $5.12 million. In other words, you would have to give away more than $5 million above and beyond the $13,000 per recipient limit to incur a tax. The lifetime limit is scheduled to fall back to $1 million in 2013, but it will still affect relatively few givers. If you did inadvertently exceed the annual limits, you can talk to a tax pro about filing the 709 form.
Dear Liz: You recently answered a question about capital gains taxes that stemmed from two siblings selling their parents’ home. The children had been added to the parents’ deed, presumably before the parents’ death. You mentioned that the capital gains tax would have been avoided if the parents had bequeathed the home rather than gifting it during their lifetimes. Presumably bequeathing the home at death would have necessitated probate and incurred inheritance taxes. Are these costs more than offset by the stepped-up tax basis received?
Answer: Your questions illustrate exactly why no parent should add a child (or anyone else) to a home deed without discussing the issue with an estate-planning attorney first. Too often, laypeople misunderstand what’s involved in probate and make expensive mistakes trying to avoid it.
In some states, probate — the court process that typically follows death — is relatively swift and not very expensive. Trying to avoid it isn’t necessarily cost effective. In other states, including California, the process potentially can take many months and eat up a good chunk of an estate. When that’s the case, it can be prudent to take steps during life to sidestep probate at death.
There are often better ways to do so, however, than adding someone to a deed. A living trust, for example, can be a good way to avoid probate and preserve the tax benefits of bequeathing, rather than gifting, assets. Living trusts can vary in cost, but a lawyer can typically set one up for $2,000 or $3,000. If you compare that with the $25,000 or more the siblings will pay in capital gains on a relatively modest home sale, you can see that the living trust probably is a better deal.
Now let’s turn to the issue of estate taxes. If the assets left by the deceased are substantial enough to incur estate taxes, they will do so whether or not the estate goes through probate. Avoiding probate, in other words, does not avoid estate taxes. Currently, only estates worth more than $5.12 million face federal estate taxes. That limit is scheduled to drop next year to $1 million, but will still affect relatively few estates.
Dear Liz: Your column on the tax issues that develop when parents deed their property to their children should help educate a lot of people. But sometimes this is done to reduce the parents’ assets so they will be eligible for Medicaid after the expiration of the look-back period. In this case, paying the capital gains tax is appropriate, because they are asking the state to pay potentially very large senior care bills.
Answer: Some would question whether it’s ever appropriate for seniors to deliberately impoverish themselves by transferring away assets in order to qualify for Medicaid, which pays long-term care expenses for the indigent. The “look back” period, in which states examine asset transfers before a Medicaid application, was established to discourage such maneuvers. Once again, it’s smart to get a legal opinion before transferring big assets. An elder-law attorney could weigh in on the pros and cons of Medicaid planning.
Dear Liz: My wife and I are trying to sell our home, which has been our primary residence for six years. I am very concerned about the $500,000 capital gains exclusion. As I understand it, the exclusion would mean we wouldn’t have to pay taxes on our home sale profit. But we are confused about this exemption being tied to the “Bush tax cuts” that could expire Dec. 31. If we sell our home after that, could we lose the exemption?
Answer: No. The law creating a capital gains exemption for home sales went into effect May 6, 1997. It’s not tied to the tax cuts approved during President George W. Bush’s tenure that are set to expire at the end of the year.
So people who live in a home for at least two of the previous five years will still be able to avoid paying capital gains on their first $250,000 of home sale profit (or $500,000 for a married couple).
Another tax you likely won’t have to pay is a new 3.8% levy on what’s called “net investment income.” Some emails circulating on the Internet falsely claim that the tax, which is scheduled to kick in Jan. 1, is a real estate sales tax. In reality, it’s a potential tax on home sale profits that exceed the capital gains exemption limit, as well as on other so-called unearned income, including investment and rental income.
If your home sale profit doesn’t exceed the capital gains exemption limit, you won’t owe the new tax. If your profit does exceed the limit, the excess amount would be added to your adjusted gross incomes to determine whether you’d have to pay it. The 3.8% tax would be levied only on people whose adjusted gross incomes are more than $200,000 for singles and $250,000 for married couples.
Dear Liz: You’ve written about how helpful it can be to have “savings buckets” or separate savings accounts earmarked for different goals such as vacations, property tax payments and so on. I have been trying to do this myself, but every bank I find charges so much in fees that it would cost more money than I would save. Either that, or they tie the savings accounts to a “free” checking account that has a high minimum balance. Can you please pass along any information about free savings accounts that have no minimum balance? I cannot use Internet banks because I cannot deposit cash when I have $5 or $10 in my pocket that I would take to the bank.
Answer: Actually, you can. Internet banks can be linked to your checking account at a brick-and-mortar bank. You can take your money to the bank, then transfer it to one of your savings accounts at the Internet bank. Unlike traditional banks, Internet banks such as ING Direct, Ally and FNBO don’t have balance minimums or monthly fees. You can set up several savings accounts without paying extra fees.
You still need a low-cost checking account, of course. You should be able to find one at a local credit union.
Back in June I wrote a post about “How to get free summer travel.” I’d arranged a 5-day trip with my daughter to the Pacific Northwest using a variety of rewards programs. The trip, which we took over Labor Day weekend, was a heck of a lot of fun. Like most vacations, it wound up costing a bit more than planned but I also learned a few things.
Re-price your reservations before you go. I checked both hotel and car reservations a few days beforehand to see if prices had dropped. They hadn’t at the Doubletree in Portland, which was in fact sold out. But the rates at Enterprise car rental fell like a rock. Plus, Enterprise emailed me a last-minute 10% off coupon for being part of its frequent traveler program. My cost for the two-day car rental went from over $100 to just $37. I love that.
Don’t try to make a same-day connection on Amtrak. We took the sleeper car up from Los Angeles, and the train fell waaaaay behind schedule–five hours, in fact. That was good news for us, since we got to see some gorgeous scenery around the California-Oregon border that would normally pass by in the dark. Passengers who were trying to make a connection to the Empire Builder, the train that goes from Portland to Chicago, weren’t so happy. They had to get off in Klamath Falls and ride several hours on a bus to meet the other train. If I were to book an Amtrak trip that involved a connection, I’d try to arrange it so that we had an overnight stay in between.
Portland’s public transportation is awesome. There was a light-rail MAX station right outside our hotel, and it took us everywhere we wanted to go while we were in town, including the Saturday Market and the zoo. A day pass for an adult was just $5. Parking at the zoo alone would have been $4, and a hassle, since there are limited spaces. When it was time to leave, I took the red line out to the airport to pick up our rental car–easy peasy.
Check out the artist/farmers markets. Speaking of the Saturday Market: I was blown away by many of the vendors there. This weekend market along the river features some really skilled craftsman offering handmade stuff at reasonable prices. I stocked up for Christmas.
Splurge a little. My daughter’s a huge fan of the Great Wolf Resort and its indoor water park south of Olympia. The rates in the summer can be steep, but my sister and I decided to split the cost of a Kid Cabin room with bunk beds. That way, we got to spend more time together, our kids had a ball and we were each out of pocket $160 rather than $320.
Peach fritter with cream cheese? Might want to skip that. My friend Michelle Rafter suggested we meet at VooDoo Donuts for a treat. Yes, the long wait was worth it, but no, I don’t think I’d order the peach fritter again–it was almost as big as my head. Next time it’ll be the maple bacon donut, for sure.
There’s a window of opportunity right now to reduce future estate taxes by moving money out of large estates. People who don’t take action could be missing a chance to save their heirs a bundle.
Here’s the deal: Currently, the estate tax exemption limit and the gift tax exemption limit are both $5.12 million. Both are scheduled to revert to $1 million after Dec. 31.
What that means is that wealthy people can give over $5 million away (over $10 million for a married couple) without owing any gift tax on that transfer. Such gifts can reduce the size of the wealthy person’s estate, so that the estate tax bill will be lower when he or she dies.
The money can be given away directly, or put into certain kinds of trusts. Any good estate planning attorney can outline the possibilities. If you’re planning to pass money to your kids, or a business, or real estate, it’s worth reviewing these.
Interestingly, a recent survey from U.S. Trust found two-thirds of the wealthy folks it polled hadn’t taken advantage of this opportunity and didn’t plan to do so. The survey respondents all had a minimum of $3 million in investable assets, with 31% having $5 million to $10 million and 32% having more than $10 million.
Now, it’s possible that Congress with pass some kind of patch or extension of the current exemption limits. It hasn’t been able to agree on much late, of course, but that can always change.
Still, if you’re concerned about estate taxes, it would make sense to meet with both a fee-only financial planner (to see if you can afford to give money away) and an estate planning attorney to see if it makes sense to pass some money along to your heirs now, rather than waiting until death.
Please welcome Jeff Yeager, one of my favorite cheapskates and an all-around good guy. I asked him to write the very first guest post for AskLizWeston.com based on advice from his latest book, “Don’t Throw That Away!” The book, and this post, focus on the middle part of the “reduce, reuse, recycle” mantra, with creative ways to get more mileage from what you already have. Here’s what Jeff has to say:
By getting a little creative and reusing would-be throwaway items, you’ll not only help save the Earth’s resources and live lighter on the planet, but you can also save some money at the same time. Here are a few examples of creative repurposing:
Dear Liz: Should I pay off my debts before I start my emergency fund savings?
Answer: It’s smart to put at least a few hundred dollars in the bank before you begin to pay down your debts. That way, if you face a small financial setback, you can tap your emergency fund and not have to add to your debt. But it doesn’t make sense to wait until you have several months’ worth of expenses saved before you pay debt, because that can take years to accomplish and you’d pay a fortune in interest in the meantime.