2015 Estate and Gift Tax Planning

This segment concerns tax planning from an estate and gift tax perspective. Below, I discuss making gifts to children and grandchildren during 2015, while incurring little or no gift tax. Also, many of these techniques could reduce your overall income tax burden. Should you have any questions, or wish to implement an estate and gifting plan, please contact us.
Use of Applicable Exclusion Amount to Reduce Estate and Gift Tax
For 2015, the estate and gift tax exclusion amount — the amount a taxpayer may transfer without incurring estate or gift taxes — is inflation-adjusted to $5,430,000. The value of a person's estate and/or lifetime gifts exceeding the exclusion amount is subject to a 40% estate and gift tax rate. Further, through a so-called “portability” provision, if a spouse dies after 2010 without exhausting his or her estate and gift tax exclusion amount, the surviving spouse may be able to use the deceased spouse's remaining exclusion amount.
Aside from being free from gift taxes, lifetime gifts of up to $5,430,000 could save estate taxes because they remove post-gift appreciation on, and possibly income from, the gifted assets from the transferor's estate.
Note also that, for transfers that are deemed to “skip” a generation, the generation-skipping transfer (GST) tax exemption for 2015 is also inflation-adjusted to $5,430,000. However, unused GST exemption may not be used by a surviving spouse (in other words, the portability provision does not apply for GST tax purposes). Like the estate and gift tax rates, the rate used for calculating the GST tax is 40%.
As explained below, certain types of lifetime gifts do not reduce a taxpayer's applicable exclusion amount and are not subject to gift tax.
Annual Gift Tax Exclusion
The most commonly used method for tax-free giving is the annual gift tax exclusion, which, for 2015, allows a person to give up to $14,000 to each donee without reducing the giver's estate and lifetime gift tax exclusion amount. A person is not limited as to the number of donees to whom he or she may make such gifts. Further, because the annual exclusion is applied on a per-donee basis, a person can leverage the exclusion by making gifts to multiple donors (family and non-family). Thus, if an individual makes $14,000 gifts to 10 donees, he or she may exclude $140,000 from tax. In addition, because spouses may combine their exemptions in a single gift from either spouse, married givers may double the amount of the exclusion to $28,000 per donee. A person may not carry over his or her annual gift tax exclusion amount to the next calendar year.
The annual gift tax exclusion applies to gifts of any kind of property, as long as the gift is of a present, rather than a future, interest, although certain types of property may require an appraisal. Gifts of appreciated property also could result in income tax savings to the giver, because the recipient would pay the capital gains tax on any sale.
Tuition Payment Exclusion
In addition to the annual gift tax exclusion, a person may make tuition payments for any individual without incurring gift tax. Though the amount that may be excluded is not limited, all payments must be made directly to a qualifying educational institution for education or training purposes. The exclusion applies only to tuition. Thus, payments for room and board, books, required equipment, or related expenses are not excludible. Because there is no limit on the gift amount, its timing is less important than with the annual exclusion. Nevertheless, if a person has the choice of making either a tuition payment or an annual exclusion gift for a particular beneficiary, it usually is preferable to make the tuition payment, because he or she still could make an annual exclusion gift later in the year.
Section 529 College Savings Plans
Contributions to a college savings plan established according to section 529 of the Internal Revenue Code (529 plan) do not qualify for the exclusion for tuition payments, but are covered by the annual gift tax exclusion. A contribution to the plan also may entitle the contributor to a state income tax deduction. Thus, a contributor can reduce his or her own income taxes by funding 529 plans for children, grandchildren, etc., with funds that would have been used for college anyway.
Qualified distributions from a 529 plan may be used for a wide range of educational expenses, including tuition, fees, books, supplies, required equipment, and room and board, but not transportation costs. An added advantage of a gift to a 529 plan is that, generally, the income earned by plan contributions is tax-free, so long as it is used for educational purposes. Also, because the contributor may be the plan's custodian, he or she can ensure that the beneficiary uses the account for educational purposes.
A special rule allows a contributor to utilize up to five annual gift tax exclusions simultaneously when funding a 529 plan. Thus, for 2015, he or she may fund the plan with up to $70,000 (5 x $14,000), then file an election with the IRS to spread this gift over five years (2015 through 2019) for gift tax purposes. By using five annual exclusions, the entire gift becomes gift-tax-free. However, the contributor must wait until 2019 to make another tax-free contribution to this plan.
Medical Payment Exclusion
Subject to limitations, a person may exclude from gift taxes all payments he or she makes directly to medical providers on behalf of another individual. The exclusion for medical payments also includes the payment of medical insurance premiums. Thus, paying a child or grandchild's insurance premiums is an efficient means of making a tax-free gift that does not consume either the annual gift tax or the estate and lifetime gift tax exclusions. Further, the payor may claim an income tax deduction for a payment made for his or her spouse or dependent.
Gifts in Trust
A person may not wish to make outright gifts to children or grandchildren, due to the loss of control over how they use the gift. Gifts in trust allow the trust creator to determine when the beneficiaries receive the money and how it is used.
By observing special requirements, a trust creator can ensure that a gift in trust qualifies for the annual gift tax exclusion. Generally, the trust is drafted to provide the beneficiary with temporary withdrawal rights over the gift (usually for 30 days), such that the gift is considered a present interest rather than one vesting in the future. Although this arrangement presents a risk that the beneficiary could withdraw the gift from the trust for purposes not to the creator's liking, the likelihood of the trust creator terminating any further gifts to the trust is usually sufficient to prevent such withdrawals. If you are interested in making a gift in trust, we can explore this option more thoroughly.
Charitable Gifts

Now is an excellent time to review charitable giving to ensure it is accomplished in the most tax-efficient manner. Charitable giving is a form of estate planning because a gift to charity never will be subject to estate or gift tax, and provides the giver with an immediate income tax deduction. If a person wishes to make a large gift, his or her circumstances must be reviewed to determine the gift's impact on this tax year's income tax liability and whether all or a portion of the gift should be deferred to a later tax year. If the gift is property and requires an appraisal (usually for gifts of property with a value in excess of $5,000, other than publicly traded stock), the process should be started as soon as possible to ensure a successful transfer.

Tax Increase Prevention Act of 2014 (Pub. L. 113-295)

Congress has extended many popular tax provisions that significantly impact individuals and businesses. Late on December 16, 2014, the Senate, following earlier action in the House of Representatives, voted 76 to 16 to pass an identical version of H.R. 5771, the Tax Increase Prevention Act of 2014 (2014 TIPA). The President signed H.R. 5771 into law on December 19, 2014. This legislation renews, at least for tax year 2014, a retroactive extension of business and individual tax provisions that expired at the end of 2013, and comes just before taxpayers and the IRS gear up for the 2015 tax filing season.
The legislation also extends multiemployer pension provisions first enacted under the Pension Protection Act of 2006 (2006 PPA).
In addition, the extenders legislation adds “ABLE Accounts” that will help disabled individuals save for their future much like the popular §529 education plans and accounts.
The Act's provisions are summarized below.
Individual Tax Extenders
• Extension of deduction for certain expenses of elementary and secondary school teachers - The legislation extends for one year (through 2014) the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom. [I.R.C. §62(a)(2)(D)]
• Extension of exclusion from gross income for discharge of qualified principal residence indebtedness - Continuing relief for distressed homeowners, the legislation extends for one year (through 2014) the ability to exclude from gross income the amount of mortgage debt on a personal residence discharged as part of a sale, short sale, etc. [I.R.C. §108(a)(1)(E)]
• Extension of parity for employer-provided mass transit and parking benefits - The legislation extends for one year (through 2014) the $250 monthly maximum exclusion amount for transit passes and van pool benefits so that these transportation benefits match the exclusion for qualified parking benefits. [I.R.C. §132(f)(2)]
• Extension of mortgage insurance premiums treated as qualified residence interest - The legislation extends for one year (through 2014) the ability of homeowners to treat mortgage insurance premiums (MIP) as deductible interest for purposes of the mortgage interest deduction. However, the deduction phases out ratably for taxpayers with adjusted gross income (AGI) of $100,000 to $110,000 (with each income amount reduced 50% for married taxpayers filing separately). [I.R.C. §163(h)]
• Extension of deduction of State and local general sales taxes - The legislation allows taxpayers in 2014 to elect to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes. [I.R.C. §164(b)(5)]
• Extension of special rule for contributions of capital gain real property made for conservation purposes - The legislation extends through 2014 the increased contribution limits and carry-forward period for amounts in excess of certain contribution limits for contributions of appreciated real property (including partial interests in real property) for conservation purposes. Certain individual and corporate farmers and ranchers also are eligible for the enhanced deduction. [I.R.C. §170(b)(1)(E)]
• Extension of above-the-line deduction for qualified tuition and related expenses - The legislation extends through 2014 the “above-the-line” tax deduction for qualified education expenses. The deduction is capped at $4,000 for individual filers with AGI of $65,000 or less ($130,000 for joint filers) or $2,000 for individual filers with AGI of $80,000 or less ($160,000 for joint filers). [I.R.C. §222]
• Extension of tax-free distributions from individual retirement plans for charitable purposes - The legislation extends through 2014 tax-free charitable contributions from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year for taxpayers who are at least 701/2. [I.R.C. §408(d)(8)]
Business Tax Extenders
• Extension of research credit - The legislation extends the research credit through 2014. [I.R.C. §41]
• Extension of temporary minimum low-income housing tax credit rate for non-federally subsidized buildings - The legislation extends application of the temporary 9% minimum credit rate for the low income housing tax credit for non-Federally subsidized new buildings to allocations made before January 1, 2015. [I.R.C. §42]
• Extension of military housing allowance exclusion for determining whether a tenant in certain counties is low-income - The legislation extends through 2014 the exclusion of military basic housing allowances from the calculation of income for determining eligibility as a low-income tenant for purposes of low-income housing tax credit buildings. [§3005 of Housing Assistance Tax Act of 2008]
• Extension of Indian employment tax credit - The business tax credit for employers of qualified employees that work and live on or near an Indian reservation is extended through 2014. [I.R.C. §45A]
• Extension of new markets tax credit - The legislation extends the new markets tax credit through 2014. The carryover of any unused limitation is extended for one year (through 2019). [I.R.C. §45D]
• Extension of railroad track maintenance credit - The legislation extends through 2014 the railroad track maintenance credit. [I.R.C. §45G]
• Extension of mine rescue team training credit - The credit for training mine rescue team members is extended through 2014. [I.R.C. §45N]
• Extension of employer wage credit for employees who are active duty members of the uniformed services - The legislation extends for one year (through 2014) the provision that provides eligible small business employers with a credit against the taxpayer's income tax liability for a taxable year in an amount equal to 20% of the sum of differential wage payments to activated military reservists. [I.R.C. §45P]
• Extension of work opportunity tax credit - The Work Opportunity Credit, which provides businesses with a tax credit for hiring employees from specified groups that historically have had difficulty finding employment, is extended through 2014. [I.R.C. §51]
• Extension of qualified zone academy bonds - The legislation authorizes the issuance of $400 million of Qualified Zone Academy bonds during 2014. The bond proceeds may be used for school renovations, equipment, teacher training, and course materials at a qualified zone academy so long as private entities have promised to donate certain property and services to the academy with a value equal to at least 10% of the bond proceeds. [I.R.C. §54E]
• Extension of classification of certain race horses as 3-year property - The legislation extends the 3-year recovery period for race horses to property placed in service during 2014. [I.R.C. §168(e)(3)(A)]
• Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements - The special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements for property placed in service in 2014 is extended. [I.R.C. §168(e)(3)(E)]
• Extension of 7-year recovery period for motorsports entertainment complexes - The legislation extends through 2014 the special 7-year cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes for property placed in service in 2014. [I.R.C. §168(i)(15)]
• Extension of accelerated depreciation for business property on an Indian reservation - The placed-in-service date for the special depreciation recovery period for qualified Indian reservation property is extended through 2014. [I.R.C. §168(j)]
• Extension of bonus depreciation - The legislation extends 50% bonus depreciation to property acquired and placed in service during 2014 (2015 for certain property with a longer production period). Taxpayers may continue to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2014. A special accounting rule involving long-term contracts and a special rule for regulated utilities also continues through 2014. (The legislation labels qualifying property as “round 4 extension property”). [I.R.C. §168(k)]
• Extension of enhanced charitable deduction for contributions of food inventory - The provision allowing businesses to claim an enhanced deduction for contributions of food inventory of wholesome food for non-corporate business taxpayers is extended through 2014. [I.R.C. §170(e)(3)(C)]
• Extension of increased expensing limitations and treatment of certain real property as §179 property - The legislation extends through 2014 the small business expensing limitation and phase-out amounts in effect from 2010 to 2013 – i.e., $500,000 and $2 million, respectively - to property placed in service during 2014. The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property also are extended through 2014. [I.R.C. §179]
• Extension of election to expense mine safety equipment - The election to expense mine safety equipment is extended to property placed in service during 2014. This election allows mining companies to expense 50% of the cost of qualified mine safety equipment in the year the equipment is placed into service. [I.R.C. §179E]
• Extension of special expensing rules for certain film and television productions - The provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States is extended through 2014. [I.R.C. §181]
• Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico - The domestic production activities deduction attributable to activities in Puerto Rico is extended through 2014. [I.R.C. §199]
• Extension of modification of tax treatment of certain payments to controlling exempt organizations - The special rules for interest, rents, royalties and annuities received by a tax-exempt entity from a controlled entity are extended through 2014. [I.R.C. §512(b)(13)]
• Extension of treatment of certain dividends of regulated investment companies - The provisions allowing for the pass-through character of interest-related dividends and short-term capital gains dividends from regulated investment companies to non-resident aliens are extended through 2014. [I.R.C. §871(k)]
• Extension of RIC qualified investment entity treatment under FIRPTA - The provision that treats a RIC as a qualified investment entity is extended through 2014. (The provision would not apply with respect to any payment made before the date of enactment that was actually withheld upon). [I.R.C. §897(h)]
• Extension of subpart F exception for active financing income - The exception from Subpart F of the Code for active financing income is extended through 2014. [I.R.C. §953(e)]
• Extension of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules - The look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations is extended through 2014. [I.R.C. §954(c)(6)]
• Extension of temporary exclusion of 100% of gain on certain small business stock - The exclusion of 100% of the gain on certain small business stock for non-corporate taxpayers is extended to stock acquired before January 1, 2015, and held for more than five years. The provision also extends for one year the rule that eliminates such gain as an AMT preference item. [I.R.C. §1202]
• Extension of basis adjustment to stock of S corporations making charitable contributions of property - The provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder's adjusted basis in the S corporation is extended through 2014. [I.R.C. §1367]
• Extension of reduction in S corporation recognition period for built-in gains tax- The rule reducing to five years (rather than 10 years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains is extended to sales of assets occurring during 2014. [I.R.C. §1374(d)]
• Extension of empowerment zone tax incentives - The ability to designate certain economically depressed census tracts as empowerment zones is extended through 2014. The tax benefits available include tax-exempt bonds, employment credits, increased expensing, and gain exclusion from the sale of certain small-business stock. [I.R.C. §1391(d)]
• Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands - The provision providing for payment of $13.25 per gallon to cover over a $13.50 per proof gallon excise tax on distilled spirits produced in or imported into the United States is extended through 2014. [I.R.C. §7652(f)]
• Extension of American Samoa economic development credit - The credit for taxpayers currently operating in American Samoa is extended through 2014. [§119 of Division A of the Tax Relief and Health Care Act of 2006]
Energy Tax Extenders
• Extension of credit for nonbusiness energy property - The 10% credit (maximum of $500) for purchases of nonbusiness energy property is extended through 2014. [I.R.C. §25C]
• Extension of the alternative fuel vehicle refueling property credit - The 30% credit for the cost of qualified alternative fuel vehicle refueling property placed in service during the tax year is extended through 2014. [I.R.C. §30C]
• Extension of second generation biofuel producer credit - The cellulosic biofuels producer credit is extended through 2014. [I.R.C. §40(b)]
• Extension of incentives for biodiesel and renewable diesel - The $1.00 per gallon production tax credit for biodiesel and the small agri-biodiesel producer credit of 10 cents per gallon is extended through 2014. The $1.00 per gallon production excise tax credit for diesel fuel created from biomass also is extended through 2014. [I.R.C. §40A]
• Extension of credits with respect to facilities producing energy from certain renewable resources - The production tax credit (PTC) for wind and certain other renewable sources of electricity is extended to facilities for which construction has commenced by the end of 2014. [I.R.C. §45]
• Extension of credit for energy-efficient new homes - The credit for the construction of energy-efficient new homes is extended through 2014. [I.R.C. §45L]
• Extension of special allowance for second generation biofuel plant property - The 50% bonus depreciation allowance for cellulosic biofuel facilities is extended through 2014. [I.R.C. §168(l)(2)]
• Extension of energy efficient commercial buildings deduction - The “above-the-line” deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings is extended through 2014. [I.R.C. §179D]
• Extension of special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities - The deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies is extended for sales prior to January 1, 2015. Rather than recognizing the full amount of gain in the year of sale, this provision allows gain on such sales to be recognized ratably over an 8-year period. [I.R.C. §451(i)]
• Extension of excise tax credits relating to certain fuels - The $0.50 per gallon alternative fuel tax credit and alternative fuel mixture tax credit is extended through 2014. [I.R.C. §6426]
Multiemployer Pension Plans
• Extension of automatic extension of amortization periods - The automatic grant of a 5-year extension to multiemployer defined benefit pension plans that apply for additional time to amortize funding shortfalls extended through 2015. Note: This provision, originally extended through 2015 under this legislation, was made permanent with the enactment of H.R. 83, Division O, §101, which repealed the sunset provision of 2006 PPA.
• Extension of shortfall funding method and endangered and critical rules - Under the 2006 PPA, there are three categories of underfunding for multiemployer defined benefit pension plans that are significantly underfunded (endangered, seriously endangered, and critical), with specific obligations for plans in each category. The 2006 PPA also generally permitted multiemployer plans to start or stop using the shortfall funding method without obtaining approval from the IRS. Set to expire at the end of 2014, this provision is extended through 2015. Note: This provision was made permanent with the enactment of H.R. 83, Division O, §101, which repealed the sunset provision of 2006 PPA.
ABLE Programs and Accounts
ABLE Accounts - The 2014 legislation allows states to create qualified ABLE programs beginning in 2015. Similar to the popular §529 accounts, contributions to ABLE program accounts grow tax free. Accounts are available only to individuals diagnosed with a disability before age 26. Beneficiaries are limited to one ABLE account and have to be residents of the state administering the program.
Earnings on an ABLE account are exempt from income tax; distributions also are exempt so long as they are used for qualified disability expenses. Qualified expenses include education, housing, transportation, employment training and support, health, assistive technology, legal fees and funeral expenses. Beneficiaries may, either directly or indirectly, dictate how contributions or earnings in an account are invested, but no more than twice a year.
Money distributed from an account that is not used for a qualified purpose is taxed as ordinary income and is subject to an additional 10% tax.
Individuals will not be able to deduct their contributions for income tax purposes and any contribution amounts that exceed the annual limit will be subject to a 6% excise tax imposed on the beneficiary.
Contributions qualify for the annual gift tax exclusion ($14,000 for 2015) and are exempt from the generation-skipping transfer (GST) tax. Distributions also generally will be exempt from gift and GST taxes. [I.R.C. §529A (new)]
Treatment of ABLE accounts under certain federal programs - ABLE accounts generally do not count against income limits for means-tested benefits, such as Supplemental Security Income (SSI) and Medicaid. If the beneficiary's resources from an account exceed $100,000, SSI benefits will be suspended until the account balance is less than that amount. Such a suspension will not affect an individual's eligibility for Medicaid.
Treatment of ABLE accounts in bankruptcy - In the case of a bankruptcy, contributions by a parent or grandparent of a beneficiary will be protected as long as they were made more than a year before the bankruptcy filing.