Taxes

Q&A: Federal estate tax exemption

January 16, 2017 By Liz Weston

Dear Liz: You mentioned that the federal estate tax exemption limit this year is $5.49 million per person. Can I double that if married?

Answer: Essentially, yes. Married couples can double the amount that can be given or bequeathed to heirs tax free. If one spouse doesn’t use up his or her exemption, the surviving spouse can use the remaining amount in addition to the surviving spouse’s own exemption.

You also should know that you can leave an unlimited amount of money to a spouse who is a U.S. citizen. (The rules for non-citizen spouses are different and could fill a whole column on their own.) This is known as the unlimited marital deduction.

Q&A: These heirs worry their parents aren’t doing enough to minimize estate taxes

January 2, 2017 By Liz Weston

Dear Liz: My parents, ages 75 and 76, have established an irrevocable gift trust for my five siblings and me. Wonderful! With the single trust, they have maxed out their lifetime gifting exemption. What else can they do with their other investments to minimize the inevitable estate taxes that will come with their deaths? They have lived a frugal life of caution and reserve, but before their nest egg can be distributed to their heirs, the government will extract millions of dollars.

Answer: If your parents maxed out their lifetime gift exemption, that means they contributed more than $10 million to the trust. It also probably means they employed an estate-planning attorney, since such trusts aren’t typically do-it-yourself projects. If that’s the case, the attorney probably has reviewed with them their other options for minimizing taxes.

They could, for example, give each sibling $28,000 ($14,000 from each parent) each year — and make similar gifts to each sibling’s spouse and children, if they were so inclined. This annual exemption limit is separate from the lifetime gifting exemption they’ve already used. If each of you is married with two kids, that would move $672,000 out of their combined estates each year.

Another way to move money out of their taxable estate, either now or at their deaths, is to donate to charities.

If they opt not to take further steps, you can take comfort in the fact that the top estate tax rate is 40%, which means the bulk of their estate will still reach their heirs. Also keep in mind that you’re in rare company — only about two estates out of 1,000 are large enough to trigger an estate tax return, now that exemption limits have been raised to $5.49 million a person.

Q&A: Your gift won’t get you a medical deduction

December 26, 2016 By Liz Weston

Dear Liz: A couple I’ve known for years recently adopted 2-year-old twins. Both will need considerable medical care, as they were born to a drug-addicted mother. In sending out announcements, my friends suggested sending funds for the twins’ medical needs, rather than toys. I took note and sent a check earmarked for their healthcare. My question is: Can I include the gift in my own medical deduction for this year’s income taxes?

Answer: No. Only medical expenses paid for yourself, your spouse and your dependents typically qualify for the medical expense deduction on your income tax returns.

The expense isn’t a charitable deduction either. Contributions have to be made to qualified charities to be deductible, and individuals don’t qualify.

Q&A: Claiming an adult child as a dependent

December 19, 2016 By Liz Weston

Dear Liz: I am paying rent for my adult son in another state. He gets occasional help from various services, but if I don’t want him to sleep on the street, I have to pay his rent and send some emergency food. I don’t see this changing. Can I claim him as a dependent or would that make me responsible for his health insurance, which I cannot afford?

Answer: Yes, you would be responsible for your son’s health insurance coverage if you claimed him as a dependent, said Carolyn McClanahan, a certified financial planner with Life Planning Partners in Jacksonville, Fla. That would mean either paying for coverage or paying the fine for not having coverage. The fine for 2016 is $695 per adult or 2.5% of your household adjusted gross income, whichever is greater. The penalty is capped at $2,085, which is likely much more than what you’d save with an additional exemption. If you’re in the 25% tax bracket, a $4,050 personal exemption is worth a little over $1,000.

The IRS has many rules about dependents, and standards for claiming adult children are much higher when they’re over 19 (or over 24 for full-time students). To qualify, your son would have to earn less than the amount of the personal exemption ($4,050 in 2016) and you must have provided more than half of his support, among other rules. The IRS has an interactive tool to help people determine dependents’ eligibility at https://www.irs.gov/uac/who-can-i-claim-as-a-dependent.

Q&A: Sheltering home profits

December 12, 2016 By Liz Weston

Dear Liz: I understand that the profit realized on the sale of a home is not subject to tax, as long as that money is reinvested in another home. What if the couple divorces before or after the sale? If they split the profit from the sale and one or both put those funds into another house as single buyers, is each exempt from the tax? Does the fact that both are in their 70s have any effect on this matter?

Answer: Your information about home sale profits is about 20 years out of date. In 1997, Congress changed the law that once allowed people 55 and older to roll up to $125,000 of home sale profits into another home tax-free. That was a one-time tax break.

Now you can shelter up to $250,000 per person in home sale profits before owing any tax, and you can use the tax break repeatedly. You have to live in the home for at least two of the previous five years to qualify for the exemption.

Divorce can change your tax situation dramatically, and you don’t want to make decisions based on obsolete information. Please consult a tax professional to make sure you understand all of the implications of your split.