LGH Consulting, Inc.

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Estimated tax payments: Who owes them and when is the next one due?

If you don’t have enough federal tax withheld from your paychecks and other payments, you may have to make estimated tax payments. This is the case if you receive interest, dividends, self-employment income, capital gains or other income. Here are the applicable rules for paying estimated tax without triggering the penalty for underpayment.

When are the payments due?

Individuals must pay 25% of a “required annual payment” by April 15, June 15, September 15, and January 15 of the following year, to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due on the next business day.

So the third installment for 2022 is due on Wednesday, September 15. Payments are made using Form 1040-ES.

How much should you pay?

The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. However, if the adjusted gross income on your previous year’s return was more than $150,000 ($75,000 if you’re married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employers from their paychecks. Those who make estimated tax payments generally do so in four installments. After determining the required annual payment, divide that number by four and make four equal payments by the due dates.

But you may be able to use the annualized income method to make smaller payments. This method is useful to people whose income flow isn’t uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business operated in a resort area during June, July, and August, no estimated payment is required before September 15.

Who owes the penalty for underpaying?

If you don’t make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by the IRS on deficiencies, times the amount of the underpayment for the period of the underpayment.

However, the underpayment penalty doesn’t apply to you if:

  • The total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
  • You had no tax liability for the preceding year, you were a U.S. citizen or resident for that entire year, and that year was 12 months;
  • For the fourth (January 15) installment, you file your return by that January 31 and pay your tax in full; or
  • You are a farmer or fisherman and pay your entire estimated tax by January 15, or pay your entire estimated tax and file your tax return by March 1.

In addition, the IRS may waive the penalty if the failure was due to casualty, disaster or other unusual circumstances and it would be inequitable to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (and reach age 62) or become disabled.

Do you have more questions?

Contact us if you think you may be eligible to determine your estimated tax payments under the annualized income method, or you have other questions about how the estimated tax rules apply to you.

© 2022

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How disability income benefits are taxed

If you’ve recently begun receiving disability income, you may wonder how it’s taxed. The answer is: It depends.

The key issue is: Who paid for the benefit? If the income is paid directly to you by your employer, it’s taxable to you just as your ordinary salary would be. (Taxable benefits are also subject to federal income tax withholding. However, depending on the employer’s disability plan, in some cases they aren’t subject to Social Security tax.)

Frequently, the payments aren’t made by an employer but by an insurance company under a policy providing disability coverage. In other cases, they’re made under an arrangement having the effect of accident or health insurance. In these cases, the tax treatment depends on who paid for the insurance coverage. If your employer paid for it, then the income is taxed to you just as if it was paid directly to you by the employer. On the other hand, if it’s a policy you paid for, the payments you receive under it aren’t taxable.

Even if your employer arranges for the coverage (in a policy made available to you at work), the benefits aren’t taxed to you if you (and not your employer) pay the premiums. For these purposes, if the premiums are paid by the employer but the amount paid is included as part of your taxable income from work, the premiums will be treated as paid by you. In these cases, the tax treatment of the benefits received depends on the tax treatment of the premiums paid.

Illustrative example

Let’s say Max’s salary is $1,000 a week ($52,000 a year). Additionally, under a disability insurance arrangement made available to him by his employer, $10 a week ($520 annually) is paid on his behalf by his employer to an insurance company. Max includes $52,520 in income as his wages for the year ($52,000 paid to him plus $520 in disability insurance premiums). Under these facts, the insurance is treated as paid for by Max. If he becomes disabled and receives benefits under the policy, the benefits aren’t taxable income to him.

Now assume that Max includes only $52,000 in income as his wages for the year because the amount paid for the insurance coverage qualifies as excludable under the rules for employer-provided health and accident plans. In this case, the insurance is treated as paid for by the employer. If Max becomes disabled and receives benefits under the policy, the benefits are taxable income to him.

There are special rules if there is a permanent loss (or loss of the use) of a member or function of the body or a permanent disfigurement. In these cases, employer disability payments aren’t taxed, as long as they aren’t computed based on amount of time lost from work.

Social Security disability benefits 

This discussion doesn’t cover the tax treatment of Social Security disability benefits. They may be taxed to you under the rules that govern Social Security benefits.

Needed coverage

In deciding how much disability coverage you need to protect yourself and your family, take the tax treatment into consideration. If you’re buying the policy yourself, you only have to replace your “after tax” (take-home) income because your benefits won’t be taxed. On the other hand, if your employer is paying for the benefit, keep in mind that you’ll lose a percentage of it to taxes. If your current coverage is insufficient, you may want to supplement the employer benefit with a policy you take out on your own. Contact us if you’d like to discuss this issue.

© 2022

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Five tax implications of divorce

Are you in the early stages of divorce? In addition to the tough personal issues that you’re dealing with, several tax concerns need to be addressed to ensure that taxes are kept to a minimum and that important tax-related decisions are properly made. Here are five issues to consider if you’re in the process of getting a divorce.

  1. Alimony or support payments. For alimony under divorce or separation agreements that are executed after 2018, there’s no deduction for alimony and separation support payments for the spouse making them. And the alimony payments aren’t included in the gross income of the spouse receiving them. (The rules are different for divorce or separation agreements executed before 2019.)
  2. Child support. No matter when the divorce or separation instrument is executed, child support payments aren’t deductible by the paying spouse (or taxable to the recipient).
  3. Personal residence. In general, if a married couple sells their home in connection with a divorce or legal separation, they should be able to avoid tax on up to $500,000 of gain (as long as they’ve owned and used the residence as their principal residence for two of the previous five years). If one spouse continues to live in the home and the other moves out (but they both remain owners of the home), they may still be able to avoid gain on the future sale of the home (up to $250,000 each), but special language may have to be included in the divorce decree or separation agreement to protect this tax exclusion for the spouse who moves out.
    If the couple doesn’t meet the two-year ownership and use tests, any gain from the sale may qualify for a reduced exclusion due to unforeseen circumstances.
  4. Pension benefits. A spouse’s pension benefits are often part of a divorce property settlement. In these cases, the commonly preferred method to handle the benefits is to get a “qualified domestic relations order” (QDRO). This gives one spouse the right to share in the pension benefits of the other and taxes the spouse who receives the benefits. Without a QDRO the spouse who earned the benefits will still be taxed on them even though they’re paid out to the other spouse.
  5. Business interests. If certain types of business interests are transferred in connection with divorce, care should be taken to make sure “tax attributes” aren’t forfeited. For example, interests in S corporations may result in “suspended” losses (losses that are carried into future years instead of being deducted in the year they’re incurred). When these interests change hands in a divorce, the suspended losses may be forfeited. If a partnership interest is transferred, a variety of more complex issues may arise involving partners’ shares of partnership debt, capital accounts, built-in gains on contributed property, and other complex issues.

A variety of other issues

These are just some of the issues you may have to deal with if you’re getting a divorce. In addition, you must decide how to file your tax return (single, married filing jointly, married filing separately or head of household). You may need to adjust your income tax withholding and you should notify the IRS of any new address or name change. There are also estate planning considerations. We can help you work through all of the financial issues involved in divorce.

© 2022

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Want to turn a hobby into a business? Watch out for the tax rules

Like many people, you may have dreamed of turning a hobby into a regular business. You won’t have any tax headaches if your new business is profitable. But what if the new enterprise consistently generates losses (your deductions exceed income) and you claim them on your tax return? You can generally deduct losses for expenses incurred in a bona fide business. However, the IRS may step in and say the venture is a hobby — an activity not engaged in for profit — rather than a business. Then you’ll be unable to deduct losses.

By contrast, if the new enterprise isn’t affected by the hobby loss rules because it’s profitable, all otherwise allowable expenses are deductible on Schedule C, even if they exceed income from the enterprise.

Note: Before 2018, deductible hobby expenses had to be claimed as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” However, because miscellaneous deductions aren’t allowed from 2018 through 2025, deductible hobby expenses are effectively wiped out from 2018 through 2025.

Avoiding a hobby designation

There are two ways to avoid the hobby loss rules:

  1. Show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing or racing horses).
  2. Run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. The IRS regs themselves say that the hobby loss rules won’t apply if the facts and circumstances show that you have a profit-making objective.

How can you prove you have a profit-making objective? You should run the venture in a businesslike manner. The IRS and the courts will look at the following factors:

  • How you run the activity,
  • Your expertise in the area (and your advisors’ expertise),
  • The time and effort you expend in the enterprise,
  • Whether there’s an expectation that the assets used in the activity will rise in value,
  • Your success in carrying on other activities,
  • Your history of income or loss in the activity,
  • The amount of any occasional profits earned,
  • Your financial status, and
  • Whether the activity involves elements of personal pleasure or recreation.

Recent court case

In one U.S. Tax Court case, a married couple’s miniature donkey breeding activity was found to be conducted with a profit motive. The IRS had earlier determined it was a hobby and the couple was liable for taxes and penalties for the two tax years in which they claimed losses of more than $130,000. However, the court found the couple had a business plan, kept separate records and conducted the activity in a businesslike manner. The court stated they were “engaged in the breeding activity with an actual and honest objective of making a profit.” (TC Memo 2021-140)

Contact us for more details on whether a venture of yours may be affected by the hobby loss rules, and what you should do to avoid a tax challenge.

© 2022

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It’s almost that time of year again! If you’re not ready, file for an extension

The clock is ticking down to the April 18 tax filing deadline. Sometimes, it’s not possible to gather your tax information and file by the due date. If you need more time, you should file for an extension on Form 4868.

An extension will give you until October 17 to file and allows you to avoid incurring “failure-to-file” penalties. However, it only provides extra time to file, not to pay. Whatever tax you estimate is owed must still be sent by April 18, or you’ll incur penalties — and as you’ll see below, they can be steep.

Failure to file vs. failure to pay

Separate penalties apply for failing to pay and failing to file. The failure-to-pay penalty runs at 0.5% for each month (or part of a month) the payment is late. For example, if payment is due April 18 and is made May 25, the penalty is 1% (0.5% times 2 months or partial months). The maximum penalty is 25%.

The failure-to-pay penalty is based on the amount shown as due on the return (less credits for amounts paid via withholding or estimated payments), even if the actual tax bill turns out to be higher. On the other hand, if the actual tax bill turns out to be lower, the penalty is based on the lower amount.

The failure-to-file penalty runs at the more severe rate of 5% per month (or partial month) of lateness to a maximum 25%. If you file for an extension on Form 4868, you’re not filing late unless you miss the extended due date. However, as mentioned earlier, a filing extension doesn’t apply to your responsibility for payment.

If the 0.5% failure-to-pay penalty and the failure-to-file penalty both apply, the failure-to-file penalty drops to 4.5% per month (or part) so the combined penalty is 5%. The maximum combined penalty for the first five months is 25%. Thereafter, the failure-to-pay penalty can continue at 0.5% per month for 45 more months (an additional 22.5%). Thus, the combined penalties can reach a total of 47.5% over time.

The failure-to-file penalty is also more severe because it’s based on the amount required to be shown on the return, and not just the amount shown as due. (Credit is given for amounts paid via withholding or estimated payments. If no amount is owed, there’s no penalty for late filing.) For example, if a return is filed three months late showing $5,000 owed (after payment credits), the combined penalties would be 15%, which equals $750. If the actual liability is later determined to be an additional $1,000, the failure-to-file penalty (4.5% × 3 = 13.5%) would also apply to this amount for an additional $135 in penalties.

A minimum failure-to-file penalty also applies if a return is filed more than 60 days late. This minimum penalty is the lesser of $435 (for returns due through 2022) or the amount of tax required to be shown on the return.

Reasonable cause 

Both penalties may be excused by the IRS if lateness is due to “reasonable cause” such as death or serious illness in the immediate family.

Interest is assessed at a fluctuating rate announced by the government apart from and in addition to the above penalties. Furthermore, in particularly abusive situations involving a fraudulent failure to file, the late filing penalty can jump to 15% per month, with a 75% maximum.

Contact us if you have questions about IRS penalties or about filing Form 4868.

© 2022

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The tax rules of renting out a vacation property

Summer is just around the corner. If you’re fortunate enough to own a vacation home, you may wonder about the tax consequences of renting it out for part of the year.

The tax treatment depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by nonrelatives if a market rate rent isn’t charged.

If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce significant tax benefits. Any rent you receive isn’t included in your income for tax purposes (no matter how substantial). On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs and no depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you rent the property out for more than 14 days, you must include the rent you receive in income. However, you can deduct part of your operating expenses and depreciation, subject to several rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days). You would allocate 75% of your maintenance, utilities, insurance, etc., costs to rental. You would allocate 75% of your depreciation allowance, interest, and taxes for the property to rental as well. The personal use portion of taxes is separately deductible. The personal use portion of interest on a second home is also deductible if the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.

If the rental income exceeds these allocable deductions, you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house personally.

Here’s the test: if you use it personally for more than the greater of 1) 14 days, or 2) 10% of the rental days, you’re using it “too much,” and you can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t go beyond that to create a loss. Any unused deductions are carried forward and may be usable in future years. If you’re limited to using deductions only up to the amount of rental income, you must use the deductions allocated to the rental portion in the following order: 1) interest and taxes, 2) operating costs, 3) depreciation.

If you “pass” the personal use test (i.e., you don’t use the property personally more than the greater of the figures listed above), you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive,” however, and may be limited under the passive loss rules.)

As you can see, the rules are complex. Contact us if you have questions or would like to plan ahead to maximize deductions in your situation.

© 2022

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How will revised tax limits affect your 2022 taxes?

While Congress didn’t pass the Build Back Better Act in 2021, there are still tax changes that may affect your tax situation for this year. That’s because some tax figures are adjusted annually for inflation.

If you’re like most people, you’re probably more concerned about your 2021 tax bill right now than you are about your 2022 tax situation. That’s understandable because your 2021 individual tax return is generally due to be filed by April 18 (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2022. Below are some Q&As about tax amounts for this year.

I have a 401(k) plan through my job. How much can I contribute to it?

For 2022, you can contribute up to $20,500 (up from $19,500 in 2021) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

How much can I contribute to an IRA for 2022?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, or up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch-up” contribution. (These amounts were the same for 2021.)

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2022, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,400 (up from $2,300 in 2021).

How much do I have to earn in 2022 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $147,000 for this year (up from $142,800 in 2021). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2022?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2022, the standard deduction amount is $25,900 for married couples filing jointly (up from $25,100). For single filers, the amount is $12,950 (up from $12,550) and for heads of households, it’s $19,400 (up from $18,800). If your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize.

If I don’t itemize, can I claim charitable deductions on my 2022 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to two COVID-19-relief laws, non-itemizers could claim a limited charitable contribution deduction for the past two years (for 2021, this deduction is $300 for single taxpayers and $600 for married couples filing jointly). Unfortunately, unless Congress acts to extend this tax break, it has expired for 2022.

How much can I give to one person without triggering a gift tax return in 2022?

The annual gift exclusion for 2022 is $16,000 (up from $15,000 in 2021). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

More to your tax picture

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions.

© 2022

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How are court awards and out-of-court settlements taxed?

Awards and settlements are routinely provided for a variety of reasons. For example, a person could receive compensatory and punitive damage payments for personal injury, discrimination or harassment. Some of this money is taxed by the federal government, and perhaps state governments. Hopefully, you’ll never need to know how payments for personal injuries are taxed. But here are the basic rules — just in case you or a loved one does need to understand them.

Under tax law, individuals are permitted to exclude from gross income damages that are received on account of a personal physical injury or a physical sickness. It doesn’t matter if the compensation is from a court-ordered award or an out-of-court settlement, and it makes no difference if it’s paid in a lump sum or installments.

Emotional distress

For purposes of this exclusion, emotional distress is not considered a physical injury or physical sickness. So, for example, an award under state law that’s meant to compensate for emotional distress caused by age discrimination or harassment would have to be included in gross income. However, if you require medical care for treatment of the consequences of emotional distress, then the amount of damages not exceeding those expenses would be excludable from gross income.

Punitive damages for any personal injury claim, whether or not physical, aren’t excludable from gross income unless awarded under certain state wrongful death statutes that provide for only punitive damages.

The law doesn’t consider back pay and liquidated damages received under the Age Discrimination in Employment Act (ADEA) to be paid in compensation for personal injuries. Thus, an award for back pay and liquidated damages under the ADEA must be included in gross income.

Attorney’s fees

You can’t deduct attorney’s fees incurred to collect a tax-free award or settlement for physical injury or sickness. However, to a limited extent, attorney’s fees (whether contingent or non-contingent) or court costs paid by, or on behalf of, a taxpayer in connection with an action involving a claim under the ADEA, are deductible from gross income to determine adjusted gross income. Specifically, the amount of this above-the-line deduction is limited to the amount includible in your gross income for the tax year on account of a judgment or settlement resulting from the ADEA claim, whether by suit or agreement, and whether as lump sum or periodic payments.

Best possible tax result

Keep in mind that while you want the best tax result possible from any settlement, lawsuit or discrimination action you’re considering, non-tax legal factors together with the tax factors will determine the amount of your after-tax recovery. Consult with your attorney as to the best way to proceed, and we can provide any tax guidance that you may need.

© 2021

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Selling a home: Will you owe tax on the profit?

Many homeowners across the country have seen their home values increase recently. According to the National Association of Realtors, the median price of homes sold in July of 2021 rose 17.8% over July 2020. The median home price was $411,200 in the Northeast, $275,300 in the Midwest, $305,200 in the South, and $508,300 in the West.

Be aware of the tax implications if you’re selling your home or you sold one in 2021. You may owe capital gains tax and net investment income tax (NIIT).

Gain exclusion

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.

To qualify for the exclusion, you must meet these tests:

  • You must have owned the property for at least two years during the five-year period ending on the sale date.
  • You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Gain above the exclusion amount 

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary income rate, which could be more than double your long-term rate.

If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss.

The NIIT

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.

However, a gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

  1. Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use.
  2. You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.

As you can see, depending on your home sale profit and your income, some or all of the gain may be tax-free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales.

© 2021

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Planning for year-end gifts with the gift tax annual exclusion

As we approach the holidays and the end of the year, many people may want to make gifts of cash or stock to their loved ones. By properly using the annual exclusion, gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2021 is $15,000.

The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $45,000 to the children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).

Note: This discussion isn’t relevant to gifts made to a spouse because these gifts are free of gift tax under separate marital deduction rules.

Gift-splitting by married taxpayers

If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given by only one of you. Thus, by gift-splitting, up to $30,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $180,000 each year to their children and to the children’s spouses ($30,000 for each of six recipients).

If gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $15,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $30,000 exclusion covers total gifts. We can prepare a gift tax return (or returns) for you, if more than $15,000 is being given to a single individual in any year.)

“Unified” credit for taxable gifts 

Even gifts that aren’t covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11.7 million for 2021. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else do not count towards the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus still give him up to $15,000 as a gift.

Annual gifts help reduce the taxable value of your estate. There have been proposals in Washington to reduce the estate and gift tax exemption amount, as well as make other changes to the estate tax laws. Making large tax-free gifts may be one way to recognize and address this potential threat. It could help insulate you against any later reduction in the unified federal estate and gift tax exemption.

© 2021