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Year-end tax tips for 2017
By Keith Herman on December 20, 2017 at 1:12 PM

Clock and calendar, showing time passingAs the year draws to an end, now is a good time to review your existing tax situation and estate planning in general. More specifically, this is also a good time to look at your annual gifting strategies in order to avoid missing some important tax opportunities.

Gift tax basics: Generally a gift tax is imposed on the value of property transferred less the value of property received in return. There are four major exceptions to this rule. First, during a calendar year, the first $14,000 worth of gifts to each separate person is excluded from taxation. In addition, a husband and wife may elect to “split gifts,” allowing the two of them to make any combination of gifts of $28,000 to an individual, tax free.

Second, certain tuition and medical payments are excluded from taxation if made directly to the school or health care provider. Third, most gifts made to a spouse are excluded from taxation. Lastly, a total of $5,490,000 of otherwise taxable gifts during life, and bequests made at death, can be excluded from taxation (gifts excluded from taxation under the first three rules do not count toward the $5,490,000 limit).

Importance of making completed gifts by Dec. 31: First, the $14,000 (or $28,000 if gift splitting) annual exclusion from gifts described above is computed based on the calendar year. Therefore, if you do not use up your $14,000 exclusion by the last day of calendar year 2017, you lose your opportunity to take advantage of your annual exclusion for the year. In addition, under current law there is a $5,490,000 lifetime exemption from gift tax for 2017. If you are going to make taxable gifts, it is better to make them sooner rather than later, for tax purposes. This is because all of the future appreciation on the property gifted will be excluded from the donor’s taxable estate for estate tax purposes.

Timing of gifts: Generally, a gift is considered made when there is a completed and irrevocable transfer of the property. In other words, the gift is complete when the donor relinquishes all dominion and control over the transferred property.

For gifts made by check to a charity, the IRS has adopted a “mailbox rule” allowing individuals to deduct charitable gifts made by check, if the check is deposited in the U.S. Mail or otherwise delivered to the charity, before the stroke of midnight on New Year’s Eve. If you drive past the mailbox on New Year’s Eve, make sure someone else sees you drop the stamped envelope in the box!

Gifts made by check to anyone other than a charity are considered complete when the check is cashed. It is important that the donee of a gift check deposits that check before New Year’s Eve, or else the gift may be final next year.

Gifts of securities are considered complete when title to the security actually changes; you need to give your broker time to complete these transfers.

For assignments of partnership or LLC interests, the gift is considered complete when the executed assignment document is delivered to the donee.

Cost basis of gifted property: Generally, for purposes of determining gain or loss on the sale or other disposition of property by a donee, the Internal Revenue Code provides a “carry-over” basis rule. This rule gives the donee a basis equal to the adjusted basis of the donor, subject to two major exceptions. First, if the donee subsequently sells the property for a loss, the donee’s basis is equal to the fair market value of the property at the time of the gift (if this amount is less than the donor’s adjusted basis). Second, the donee’s basis may be increased by the portion of the gift tax paid that is attributable to the net appreciation in the gifted property. Many donors will give appreciated securities to charity, and cash to family members, to minimize the capital gains tax cost.

Legal documents to complete by Dec. 31: If you are planning to transfer partnership units or LLC membership units by year end, assignment documents need to be prepared by your attorney and executed prior to Dec. 31. In addition, deeds transferring real estate also need to be prepared and executed prior to year end. If you wish to make a transfer to a trust for a minor beneficiary, the trust needs to be executed by year end.

A word about estate tax repeal: Congress’ final tax bill does not fully repeal the estate tax but doubles the exemption. Therefore, all of the estate/gift tax planning we have been doing for decades will continue to be important. The bottom line for year-end gifting is that this law is unlikely to alter any plans for this year.

The benefits of paying legal bills by Dec. 31: Under the existing law effective this year, a portion of legal fees for estate planning may be deductible as an expense paid for the management, conservation, or maintenance of property held for the production of income. However, this deduction (and all other miscellaneous itemized deductions) is being removed by the pending tax bill. Therefore, paying legal bills before by Dec. 31, 2017, is of extra importance this year, as the payment is unlikely to be deductible in coming years.

For more information, please contact a member of Greensfelder’s Trusts & Estates Group.

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