What Can I Deduct From My Estate and Gift Taxes?
If you find that your estate will likely exceed the current estate tax exemption of $5 million, you can count on the following deductions and exclusions to help you reduce the tax burden upon the estate.
Taken straight from the “Frequently Asked Questions on Estate Taxes” section of the IRS.gov website, eligible deductions include:
- Marital Deduction: One of the primary deductions for married decedents is the Unlimited Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass "outright." In some cases, certain life estates also qualify for the marital deduction.
- Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate. (Please note that not all non-profits are tax deductible, so make sure your charity qualifies before you make the gifts. You can get information about tax-exempt organizations, including those eligible to receive tax-deductible charitable organizations, by using Exempt Organizations Select Check).
- Mortgages and Debt.
- Administration expenses of the estate, including attorney and executor fees.
- Losses during estate administration.
- Funeral costs of your estate.
Although the Unlimited Marital Deduction sounds great, you should be careful. Many couples use this deduction to avoid estate tax on the first death. However, this often leaves the whole estate to the survivor, which may exceed the unified credit equivalent amount as a result.
This tactic also does not take advantage of the $5 million credit equivalent exclusion available prior to passing of the first spouse. With a little planning, couples can avoid unnecessary estate taxes by dividing their joint estate, so that each spouse takes advantage of their credits and uses the marital deduction for amounts that exceed the unified credit equivalent.
A common strategy used for reducing estate taxes, is to give away assets that you own as “gifts” that ultimately can reduce the value of your estate and the subsequent estate taxes, which are lower than gift taxes.
According to the IRS, any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return is a considered a gift. The general rule is that any gift is a taxable gift if they total more than the annual exclusion for the calendar year. Generally, the donor is responsible for paying the gift tax. However, under special arrangements the recipient may agree to pay the tax instead.
Currently, you can give gifts valued up to $13,000 per person, to any number of people, and none of the gifts will be taxable. However, gifts of future interests cannot be excluded under the annual exclusion. A gift of a future interest is a gift that is limited so that its use, possession, or enjoyment will begin at some point in the future. If you are married, both you and your spouse can separately give gifts valued up to $13,000 to the same person without making a taxable gift.
What can be excluded from gifts?
Although the general rule is that any gift is a taxable gift, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.
- Gifts that are not more than the annual exclusion for the calendar year.
- Tuition or medical expenses you pay for someone. Payments must be made directly to the institution not just earmarked for this use and given to the beneficiary.
- Gifts to your spouse.
- Gifts to a political organization for its use.
Ultimately, the IRS puts it best, “the laws on Estate and Gift Taxes are considered to be some of the most complicated in the Internal Revenue Code. For further guidance, we strongly recommend that you visit with an estate tax practitioner (Attorney or CPA) who has considerable experience in this field.”
For more information about this subject, refer to following:
Publication 950, Introduction to Estate and Gift Taxes
Frequently Asked Questions on Estate Taxes
Frequently Asked Questions on Gift Taxes
Exempt Organizations Select Check