Believe it or not, the end of 2020 is quickly approaching (insert collective sigh of relief). While I think most of us are ready to start looking forward to 2021 and would prefer to not even have to utter the words 2020 anymore, now is the time to finish off the year strong by reviewing simple, yet important, year-end tax planning and wealth transfer tips.
When most people think of tax planning and wealth transfer, they may have in mind complex estate planning documents and an overload of legal and accounting advice. But that doesn’t have to be the case. Here are three simple tips that you can implement with relative ease, though you will want to consult your tax advisor first.
1. The Annual Gift Tax Exclusion. The simplest tax planning and wealth transfer technique involves the all-too-familiar annual gift tax exclusion. The annual gift tax exclusion is an amount that a person may give to another person without having to file a gift tax return or otherwise report to the IRS. The current exclusion is $15,000 per person receiving the gift. The exclusion is indexed for inflation, but it may only increase in $1,000 increments. Further, married taxpayers may elect “gift-splitting,” which basically doubles the amount of the gift that they may make to one person using the gift tax exclusion; for each person receiving the gift, the limitation would be $30,000 rather than $15,000. For example, if a married couple has two children and four grandchildren, they can give up to $30,000 to each of these people tax-free and without having to report it to the IRS. Therefore, the married couple may transfer $180,000 total to the children and grandchildren. Going further, if the children are also married, the taxpayers may give an additional $30,000 to each child’s spouse, which may be desirable if the child and the spouse hold a joint checking or investment account. Note, however, that a gift tax return would need to be filed if the taxpayers elect gift-splitting. The gifts are not taxable at all, but the IRS would like to know that the $30,000 was gifted via gift-splitting.