With constant proposals, updates and revisions being made to the federal tax code, it can be a daunting task to keep up with all the changes. Earlier this year, President Barack Obama proposed several changes to estate and gift taxes. We broke down the basics in a brief overview below.
Treating Death as a Recognition Event
In the 2015 State of the Union, President Obama proposed changes to the estate tax that would alter how property is taxed at death and would close a loophole for trust fund holders. Under the current law, if an individual sells inherited stocks immediately after the original holder’s death, he or she would not have to pay a capital gains tax. The proposal from the Obama administration would treat death as a recognition event, therefore triggering an estate tax and possibly a capital gains tax.
The proposal would also raise the dividends and top capital gains tax rate from 20 percent (plus 3.8 percent on net investment income) to 28 percent. Basic personal property and inherited small businesses would be exempt. Experts say this proposal is unlikely to pass because it would be in addition to current estate and gift taxes.
The president also proposed a change to gift taxes. Under the current law, an individual can transfer up to $14,000 to another individual without being taxed. This exclusion gift only applies if the the recipient has a present interest, meaning they have immediate access to use and enjoyment of the gift. There is no limit to the number of tax-free gifts an individual can make.
The proposal from the White House would remove the present interest requirement, and cap the annual exclusion gift amount at $50,000—legally limiting the number of full $14,000 donations to three donees per year.
The proposal also affects monetary gifts to children and grandchildren at death. Currently, under the American Taxpayer Relief Act of 2012, the fixed amount is $5 million with a 40 percent estate tax. The proposal would lower the amount to $3.5 million and raise the estate tax rate to 45 percent beginning in 2018.
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