Year-end gifts

The exemptions for both the federal estate tax and the federal gift tax are $5.12 million for 2012 and drop to $1.0 million in 2013. Few advocate that result. But President Obama’s proposal in compromise, a $3.5 million estate tax exemption, would also slash the gift tax exemption back to $1.0 million. The enlarged shelter from transfer tax for major gifts could become a historical anomaly.

Making a major gift in 2012 “locks in” that larger gift tax exemption. This also could be a good year for funding a dynasty trust, as the Generation-Skipping Transfer Tax exemption is also scheduled for major reduction next year.

Annual exclusion gifts remain a tried-and-true strategy. The annual exclusion will be increased to $14,000 in 2013, from its $13,000 level this year. A gift of appreciated assets to a low-bracket taxpayer can result in meaningful tax savings. The 0% capital gains tax rate for taxpayers in the 15% income tax bracket expires at the end of this year, along with the rest of the “Bush tax cuts.”

Charitable gifts. The exclusion from income for direct transfers from an IRA to a charity by taxpayers who are 70 ½ and older expired at the end of 2011. The provision was a popular one. Many retirees had their IRA custodian send their required minimum distributions (RMDs) directly to charity, as that satisfied the RMD mandate without boosting the taxpayer’s income.

In the absence of the renewal of that provision, retirees are free to accept their RMDs, make a gift to charity, and then claim a tax deduction. However, not all retirees itemize their deductions, and the usual rules for income tax deductions will apply.

(November 2012)