Connecticut recently increased its lifetime gift tax exemption to $2.6 million, and it will continue to climb in the coming years. This means you won’t owe a Connecticut gift tax unless the gifts you provide in those years exceed their corresponding exemption levels. But even if you do, there are plenty of steps you can take to protect your assets and your estate from taxes. This article will explain everything you need to know about Connecticut and federal gift taxes, as well as ways you can steer clear of these taxes. We can also help you find a financial advisor to guide you through the entire estate planning process.
What is the Connecticut Gift Tax?
Beginning on January 1, 2018, the Connecticut gift tax exemption climbed to $2.6 million. It will rise to $3.6 million in 2019. On January 1, 2020, the Connecticut gift tax exemption is scheduled to match the federal lifetime gift and estate tax exemption. That currently stands at $11.18 million (roughly $22 million for married couples).
So unless you gift cash, property or other assets valued past these thresholds, you won’t owe a Connecticut gift tax out of pocket. But you may owe a gift tax at the federal level.
What is the Federal Gift Tax?
Following the passage of the Trump Tax Plan, the annual federal gift tax exemption rose to $15,000 for 2018 and 2019. This means you can gift assets worth up to $15,000 without triggering a federal gift tax. And this applies per person. So you can give $15,000 each to your son, daughter and grandchild without catching Uncle Sam’s attention.
But even if you go over this limit, you may just need to file some extra paperwork. For instance, you must report it on IRS Form 709. It’s also known as the United States Gift (and Generation-Skipping Transfer) Tax Return.
However, gifting more than $15,000 in a year would begin eating away at your lifetime gift and estate tax exemption. Though it currently stands at $11.18 million for 2018, it rises to $11.40 million for 2019.
Once you provide gifts valued above those levels, you’d owe an out-of-pocket gift tax.
So assume you give away $20,000 in 2019. You breach the annual exclusion by $5,000. So you have to subtract that amount from your lifetime exemption : $11.40 million – $20,000 = $11.38 million. That’s how much you have left to give away in your lifetime before paying a gift tax. This assumes you breached the annual exclusion for the first time in 2019.
The same rule applies to the Connecticut state gift tax. You’d owe this after you gift more than what the state allows as a lifetime gift exemption. The top rate on the Connecticut gift tax is 12%. The top rate for the federal gift tax peaks at a whopping 40%.
But even if you do owe an out-of-pocket gift tax at the state or federal level, there are many steps you can take to protect your estate from the government while also staying generous.
Protecting Your Estate from Taxes
Passing on wealth when you die is technically gift giving in the eyes of the IRS. That’s why it’s called the lifetime gift and estate tax exemption. To make it clearer, you have less of your estate to pass to loved ones tax free when you die if you began to use up your lifetime exemption when you were alive.
However, the estate tax applies to assets and property that you pass on to heirs after you’ve passed away. The federal government and Connecticut each levy their own estate tax.
For tax year 2018, Connecticut would levy a tax on the portion of your estate you leave behind to heirs if it exceeds more than $2.6 million in value. Notice that’s equivalent to the 2018 Connecticut lifetime gift tax exemption.
The Connecticut estate tax ranges from 7.2% on estates valued at more than $2.6 million to 12% on those valued at more than $10 million. However, Connecticut caps the estate tax at $20 million. It is scheduled to be reduce to $15 million in 2019. The federal estate tax rate can climb up to 40%.
So in general, leaving behind a smaller estate decreases the chances that the government will take a cut before it is passed on to the proper beneficiaries.
One way to do so is by taking advantage of the federal annual gift tax exclusion. Remember, you can give up to $15,000 per person each year without even having to file any paperwork with the IRS.
So you can give $15,000 each to your son and daughter each year without having to worry about taxes. But they may be too young to manage this amount of money wisely on their own. One solution could be creating a trust fund and naming your kids as the beneficiaries.
Protecting Your Estate With Trusts
There are several types of trusts out there, including irrevocable trusts. When you transfer assets to these trusts, they technically leave your ownership. While the transfers count as gifts, they effectively reduce the size of your estate.
You can also designate a trustee such as qualified financial advisor to manage the assets in the trust. These can include virtually any property including the following:
Certificate of deposit (CD) accounts
What Gifts Don’t Get Taxed?
The federal government excludes certain expenses from the gift tax entirely. This means you won’t owe taxes on these gifts even if their value exceeds your lifetime gift tax exemption. They include the following:
Spouse: You’re always free to give your husband or wife cash without the government sticking its nose in your business.
Charities: If you make a gift directly to a registered nonprofit organization, Uncle Sam won’t tax it.
Medical Expenses: If you send money directly to the entity providing care to cover someone else’s medical expenses, you’d most likely avoid any gift tax. As far as the IRS is concerned, qualified medical expenses include disease treatment, long-term care insurance, transportation required for medical care and several other expenses. Check with a local CPA or financial advisor for more details.
Tuition: If you send money directly to an educational institution to cover tuition, it is not considered a taxable gift. However, keep in mind that you need to send the money to the school. If you give it directly to your son or daughter, for example, it will count toward your lifetime gift tax exception. Also note that books and school supplies don’t count. But you can fund these by taking advantage of 529 college savings plans.
529 College Savings Plans and Gift Tax
If you contribute to a 529 college savings plan on behalf of someone else, you’re making a taxable gift. However, there is a special exemption involving 529 plans. You can make a one time lump-sum contribution of up to $75,000 toward a 529 plan without eating into your lifetime gift tax exemption. The only catch is that you can’t make any more contributions toward the plan with the same beneficiary in the next five years.
If you simply gave away $75,000 in 2018 or 2019, it would count against your lifetime exemption because you gave away more than $15,000 and breached your annual exclusion. Not so if you move it to a 529 plan. In essence, the IRS lets you use up five years worth of applicable exclusions (5 x $15,000) in one shot.
What Else Should I know About The Gift Tax?
Keep in mind that laws surrounding gift and estate taxes can change. For example, the new lifetime gift and estate tax exemption was made possible by the Tax Cuts and Jobs Act. However, this rate is set to expire in 2025. Unless Congress takes action to make these permanent, the rate will likely revert back to its pre-2017 levels at about $5.49 million for individuals.
The Connecticut gift tax exemption will increase gradually each year until 2020. But that doesn’t mean it will continue to rise. In fact, it may dip. In addition, some Connecticut lawmakers want to dial back the estate tax or undo it entirely. But until then, dying in the Nutmeg State may cost you if you’re leaving behind a sizable estate.
And one note more on reporting gifts: Individuals typically don’t need to fill out a Form 709 to report gifts unless they exceed the applicable gift tax exclusion for the year. Married couples who make joint gifts, however, always need to report it regardless of value. So if you and your spouse provide a $10,000 gift to help with your daughter’s wedding expenses, for example, you’d have to file it with the IRS.
Unless you’ve made substantial gift giving in your lifetime, you likely won’t owe any out-of-pocket gift tax. For 2018, the Connecticut gift tax exemption stands at $2.6 million. For 2019, that number rises to $3.6 million. And it will climb in the coming years. In 2018, the Tax Cuts and Jobs Act raised the federal lifetime gift and estate tax exemption to roughly $11.18 million ($22 million for married couples). One way to avoid the gift tax is to take advantage of the $15,000 annual exception. Unless you go over this limit, you won’t even have to report it to the IRS. You can also take advantage of trusts and other estate planning strategies to protect what you pass on to loved ones upon death. These strategies are deployed best with the help of a competent attorney and financial advisor.
Tips for Estate Planning
If you’d like to work with a financial advisor, we can help. Our SmartAsset financial advisor matching tool connects you with up to three local advisors. It also provides access to their profiles. So you can review their qualifications before deciding to work with one.
Once you’re ready to meet a financial advisor, it’s important to keep some points in mind. To help, we’ve published a list of the five questions to ask when choosing a financial advisor.
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