We have received many questions recently about the 2016 tax laws, which may be driven by the fact that many Americans are finalizing their 2015 tax returns. The IRS announced its new inflation-adjusted tax rates for 2016, but in reality, the rates will not affect the majority of the U.S. population. The federal lifetime estate and gift tax exemption rose to $5.45 million per person. If you die in 2016, the exemption permits your estate to exempt up to $5.45 million from estate tax. A husband and wife each receive their own exemption. Therefore, it is possible for spouses to give away up to $10.9 million either during lifetime, upon death, or a combination of both, without incurring any estate tax through spousal portability, which is explained in more detail here (To Open Probate or Not to Open Probate, That is the Question). While the estate tax exemption was only increased by $20,000 per person (or $40,000 per married couple) this year, the exemption has increased by $450,000 per person (and $900,000 per married couple) since 2011.
The top federal estate tax rate remains at 40%. This is the tax rate assessed upon all assets in excess of $5.45 million. While this rate may seem steep, the effective tax rate is not as significant. For example, if you have an estate worth $8 million at the time of your death, only $2.55 million is subject to estate tax. The total federal tax you will pay is $1.02 million, which makes the effective tax rate 12.75%. Additionally, if you have unused spousal portability, it may result in the assessment of no estate taxes.
The federal generation skipping transfer tax has also been increased to $5.45 million, with the top tax rate remaining at 40%. The annual exclusion from gift taxes remains at $14,000. This means a person can give away up to $14,000 per person per year that is not counted toward the lifetime exclusion and married couples may give away up to $28,000 each year to as many people as they wish. It is never too early to begin estate planning. For example, if you utilize the full gift exclusion each year, you can give away much more than the allotted exclusion amount tax-free.
For most taxpayers, standard income tax deductions did not change in 2016. The $6,300 deduction for single taxpayers and the $12,600 deduction for married couples remained consistent. However, the deduction for heads of household increased from $9,250 in 2015 to $9,300 in 2016.
Finally, it is important to note that while tax rate increases may be insignificant or nonexistent, for the first time the IRS announced the imposition of inflation-adjusted penalties. This development has wide-reaching ramifications, as penalties include interest and increases in the consumer price index.
Michael Salad is an attorney in Cooper Levenson’s Business & Tax and Cyber Risk Management practice groups. He concentrates his practice on estate planning, business transactions, mergers and acquisitions, tax matters and cyber risk management. Michael holds an LL.M. in Estate Planning and Elder Law. Michael Salad is licensed to practice law in New Jersey, Florida and the District of Columbia. Michael may be reached at 609.572.7616 or via e-mail at email@example.com.
Peter Fu is an attorney in Cooper Levenson’s Business & Tax and Cyber Risk Management practice groups. He concentrates his practice on sales and use tax, enterprise risk management, and commercial transactions. Peter is licensed to practice law in New Jersey and Florida. Peter can be reached at 609.572.7556 or via e-mail at firstname.lastname@example.org.