The Internal Revenue Service has released the official inflation adjustments that will affect 2015 federal reporting for estate taxes, gift taxes, generation-skipping transfer taxes, and estate and trust income taxes.
2015 Federal Estate Tax Exemption
- In 2015 the estate tax exemption will be $5,430,000. This is an increase of $90,000 above the 2014 exemption.
- What this means is that when the value of the gross estate of a person who dies in 2015 exceeds $5,430,000, the estate will be required to file a federal estate tax return (IRS Form 706). Form 706 is due within nine months of the deceased person’s date of death.
- The maximum federal estate tax rate remains unchanged at 40%.
2015 Federal Lifetime Gift Tax Exemption
- In 2015 the lifetime gift tax exemption will also be $5,430,000. This is an increase of $90,000 above the 2014 exemption.
- What this means is that if a person makes any taxable gifts in 2015 (in general a taxable gift is one that exceeds the annual gift tax exclusion – see more on that below), then they will need to file a federal gift tax return (IRS Form 709). For taxable gifts made in 2015, Form 709 is due on or before April 15, 2016.
- The maximum federal gift tax rate remains unchanged at 40%.
2015 Annual Gift Tax Exclusion
- In 2015 the annual gift tax exclusion will be $14,000. This is the same as the 2014 exclusion.
- What this means is that if a person makes any gifts to the same person that exceed $14,000 in 2015, then they will need to file a federal gift tax return (Form 709). For taxable gifts made in 2015, Form 709 is due on or before April 15, 2016.
- Note that if the taxable gift does not exceed $5,430,000, then no gift tax will be due; instead, the lifetime gift tax exemption of the person who made the gift will be reduced by the amount of the taxable gift.
- As mentioned above, the maximum federal gift tax rate remains unchanged at 40%.
2015 Estate and Trust Income Tax Brackets
Finally, estates and trusts will be subject to the following income tax brackets in 2015:
If Taxable Income Is:
- Not over $2,500, the tax is 15% of the taxable income
- Over $2,500 but not over $5,900, the tax is $375 plus 25% of the excess over $2,500
- Over $5,900 but not over $9,050, the tax is $1,225 plus 28% of the excess over $5,900
- Over $9,050 but not over $12,300, the tax is $2,107 plus 33% of the excess over $9,050
- Over $12,300, the tax is $3,179.50 plus 39.6% of the excess over $12,300
As you can see, an income of only $12,300 inside a trust could be taxed at a marginal rate of 39.6%. In addition, many trusts paying at the top bracket are also subject to the 3.8% net investment income tax, making the top marginal rate 43.4%. Many states also impose an income tax on trusts. So, depending on which state the trust pays income taxes, the marginal income tax rate could be over 50% for trusts earning just $12,300.
What this means is that Trustees should give careful consideration to the timing of income and deductions and whether distributions of income to beneficiaries should be made to avoid paying excessive trust income taxes. Any income tax planning, of course, has to be balanced against a Trustee’s fiduciary duties to the trust.