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IRS says more people are taking advantage of tax-free gifts

In order to avoid estate taxes, many people choose to gift assets to their heirs before they pass away. This often results in a smaller estate that would be taxed at a much lower rate than had they waited until their death to have their assets distributed. Today, gifting has become increasingly popular because the threshold for gift taxes is much higher than it once was.

A few years ago, any gift over $1 million could be taxed, which meant people had to limit how much they passed on. In 2010, however, the gift tax threshold was raised to $5 million. Although this change expired in 2012, Congress extended it and decided that it would increase with inflation. Today, a person can gift up to $5.34 million without being taxed. Gifting more than that will result in a 40-percent tax.

The increase in the gift tax threshold has resulted in a dramatic increase of tax-free gifts. In 2012 alone, $122 billion in tax-free gifts were made. Gifts of more than $1 million made up most of the money. Some people, however, are not convinced that the high gift tax threshold is here to stay.

Now that the threshold is permanently attached to inflation, meaning it will likely continue to increase, one expert in fiscal policy believes Congress may put an end to it.

If you haven't considered gifting as part of your estate plan, now may be the time to do it. Making gifts to your heirs now may help you all avoid taxes in the long run.

Source: Bloomberg Businessweek, "Tax-Free Gifts Quadrupled in U.S. After IRS Limit Lifted," Richard Rubin and Margaret Collins, Jan. 27, 2014

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