Good news for folks who are planning ahead and trying to maximize the savings in their estate while minimizing taxation: on May 21, 2012, Governor Bill Haslam signed a law passed by the General Assembly repealing the gift tax and phasing out the inheritance tax in Tennessee. This opens up options that were previously unavailable or which would have been made less appealing by the risk of high taxation on gift-giving and inheritance.
Gift tax, according to the IRS, is “a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return,” regardless of whether or not the donor intends for the transfer of property to be a gift. The bill passed by the General Assembly and signed by Governor Haslam eliminates the gift tax retroactive to January 1, 2012.
Estate tax, also known as inheritance tax in Tennessee, is a tax on property that is transferred after the death of the property owner. At present there is both a federal estate tax, which you can learn about at the IRS website, and a state inheritance tax. In Tennessee, property valued over $1 million is currently subject to the state tax. Beginning in 2013, property valued over $1.25 million will be subject to taxation; in 2014 the cutoff point for tax-free gifts will rise to $2 million; in 2015 it will rise to $5 million; and in 2016 there will be no inheritance tax in the state of Tennessee.
This change is especially exciting at this point in time because of changes being made to the federal gift tax this year. Presently the federal gift tax exemption is $5.12 million; that is, lifetime gifts over $5.12 million are subject to federal taxation. But in 2013 the exemption could be significantly reduced to as little as $1 million. Of course it is impossible to predict what Congress will do. This combination of changes to both the state and federal gift taxes gives Tennesseans a small window of opportunity to give larger gifts without those gifts being subject to taxation. Since the Tennessee gift tax has been eliminated retroactive to the beginning of 2012, individuals and couples who wish to make large gifts may be wise to do so this year, before the federal gift tax exemption decreases.
Figuring out the best way to preserve your assets and pass them on to your loved ones can be complicated and stressful. For help with sorting through the options and finding the best solution for you and your family, get in touch with Elder Law of East Tennessee today.