When it comes to tax exemptions, exclusions, and deductions, there is a lot to learn for estate planning purposes. If you are just starting out with your estate plan, you should understand a few basic tax concepts.
What Is an Exemption?
For estate planning, the term exemption usually refers to the estate and gift tax exemption. This is a dollar limit above which you must pay estate and gift taxes. If the total of your lifetime gifts and the value of your taxable estate are lower than the exemption amount, then your estate is exempt from estate taxes.
Right now, the estate tax exemption is $11.40 million for individuals and twice that for married couples. But this high exemption amount may get lower in 2025 if Congress does not pass a law extending the higher amount. Before 2018, the exemption was $5.49 million for individuals. With the lower exemption, it was more likely that the estates of people who owned valuable real estate or had a lot of cash on hand might end up owing estate taxes.
What Is an Exclusion?
For estate planning, the term exclusion usually refers to the gift tax exclusion. Every year, you can make gifts to one person of up to the exclusion amount before you owe taxes. In 2019, the exclusion amount is $15,000. So as an example, you could give your niece $10,000 and your grandchild $10,000 this year, and you would not owe taxes on those gifts. But if you gave either person more than $15,000, you would need to report it to the IRS and pay taxes. The exclusion amount applies to gifts of any type, not just cash, given without receiving anything of value in return.
What Is a Tax Deduction?
For estate planning, the term deduction usually refers to making deductions for charitable contributions. Gifts that you make to a 501(c)(3) charitable organization – whether during your lifetime or in your will – do not generate liability for gift and estate taxes. In fact, you receive a deduction from potential tax liability.
Further, deduction could refer to the deduction you can take for some estate planning and administration costs. While you cannot deduct the entire cost of estate planning, you may be able to take a deduction for tax-related expenses or for the costs of administering the estate of someone who passes away. Talk to your estate planning attorney and tax professional for help understanding if you can take these deductions.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.
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