Increase in Federal Estate Tax Exemption for 2016

As of January 1, the federal lifetime estate and gift tax exemption has increased for inflation to $5.45 million per person. This is just slightly up from $5.43 million in 2015. Married couples can get the benefit of two individual exemptions, so in 2016 the total exemption per couple will be $10.9 million. Persons who die in 2016 with estates valued at the exemption amount or less (taking into account their cumulative lifetime gifting), and persons who have made cumulative lifetime gifts valued at the exemption amount or less, will owe no federal estate or gift tax on the transfers. Those with estates and/or lifetime gifts in excess of such exemption amounts will owe a 40% tax on the value of the same to the extent of such excess, after taking into account appropriate credits and deductions (e.g., the marital or charitable deduction).

In related 2016 news, the federal “annual gift exclusion,” also indexed for inflation, will remain where it has been since 2013 – at $14,000 per recipient. What this means is that an individual can gift up to $14,000 to another person tax-free and without the need to report the gift on a gift tax return (IRS Form 709).  There is no limit on the number of $14,000 gifts a taxpayer can make, as long as each is to a different person. If a non-charitable gift in excess of $14,000 is made to a non-spouse in 2016, the donor must file a gift tax return, and such amounts will be subtracted from the donor’s $5.45 million federal lifetime estate and gift tax exemption. That said, transfers between spouses are usually wholly tax-free, no matter the amount transferred.

Washington has yet to officially release its state estate tax inflation adjustment for 2016. The 2015 amount was $2.054 million per person, and we may see it slightly increase again this year, so stay tuned. (Last year, the exemption amount was released in March.) Washington estates in excess of the exemption amount are subject to a 10-20% Washington state estate tax, with overall rate depending on the size of the estate over the exemption amount. Washington does not currently impose a gift tax, which makes lifetime gifting particularly important for Washington clients who have potentially taxable estates.