Taxation

Although we have an estate tax, the good news is that in 2020 you must have over $11.58 million to have an exposure to the tax. What this means is that if you have under $11.58 million you will not pay any estate tax to the federal government. Additionally, Congress has allowed married couples to combine their exemptions through what is called “portability” to obtain an exemption of over $23 million.

As a consequence of these high exemptions, 99% of Americans are exempt from having to pay any sort of federal estate tax. If we take a look back at the late 1990s for example this is a massive relief for the taxpayer. For example, in 1999, just 20 years ago, the estate tax exemption was set at $650,000 and had a high rate of 55%. What that means is that if you were a single person and had a $2 million estate in 1999, your estate would have received a tax bill of $742,000! But now, thanks to the extremely high exemptions, most Americans have little to fear about this tax.

Under the current tax code, all Americans have a “unified credit” or “lifetime exemption” that they may use during their lifetime or at their death. In 2019, the amount of this unified credit is $11.4 million per individual. What this means is that if you want to give away all your assets that are under $11.4 million you can do so and avoid any tax consequences. However, you do need to report the gift to the IRS using Form 709 if the gift is over $15,000 to any individual.

Here is an example: Let’s say Lisa wants to give her daughter Beth $100,000. Lisa can make this gift without any tax consequences by using some of her lifetime exemption of $11.4 million. Beth could go ahead and make the gift and then file a Form 709 gift tax return telling the IRS that she has used some of her lifetime exemption to make the gift tax free.

One of the most common questions we get is whether it is a good idea to add a child’s name to a deed. The reason most people ask this question is that they want their children to inherit the house with no complications of probate or they want their children to care for their property when they are unable to do so. Makes sense, right? While you certainly can add your child’s name to the deed, it may not be the best idea. Here’s why:

• Gift tax complications
• Loss of step up in tax basis

When you put your child’s name on your deed, it is considered a gift by the IRS and can be subject to the gift tax. Here is an example: Glenn has a $100,000 home that is paid for. He decides to add his daughter, Samantha, to the deed. When Glenn adds Samantha to the deed he makes a gift. Glenn would then need to prepare and file a Form 709 gift tax return on his taxes for the calendar year in which he made the gift to avoid any gift tax complications. By filing this form he is telling the IRS that he is using a portion of his lifetime exemption to make the gift tax free.

Now let’s say that Glenn wants to completely gift the house to Samantha. Glenn bought the house for $10,000 in 1989. That number is considered his “tax basis”, or essentially what he paid for something. Thirty years later, the house is worth $100,000. If Glenn sells the house he has a capital gain of $90,000. If Glenn gifts the house to Samantha outright, Samantha would inherit Glenn’s tax basis of $10,000 and incur a significant capital gains tax if Samantha sells the property. However, if Glenn holds the house until his death, Samantha would be able to inherit a step-up or “bump up” in tax basis to the market value of the house at Glenn’s death. So if the house is worth $100,000 at Glenn’s death and Samantha decided to sell the house at $120,000, the she would only have to pay capital gains tax on $20,000 instead of $110,000, significantly less amount. This would save Samantha thousands of dollars in tax.