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New $14,000 Gift Tax Annual Exclusion and Other Inflation Adjustments

By law, a number of tax provisions must be adjusted annually to keep pace with inflation. Before these numbers were adjusted for inflation, taxpayers automatically fell into higher tax brackets as their income rose with the cost of living. This was a stealth tax increase. Those taxpayers were paying more tax on the same "purchasing power." Now, the tax system includes some inflation adjustments to reduce the stealth tax increase.

The IRS has recently announced the inflation adjustments that will go into effect for 2013. These changes are important because they adjust numbers that will affect every taxpayer.

The gift tax annual exclusion amount will be increased from $13,000 in 2012 to $14,000 in 2013. The IRS announced that the cost-of living adjustment had pushed up the exclusion another $1,000. This is the first increase since 2009. For calendar year 2013, the first $14,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts under §2503 made during that year.

This cost of living adjustment to the annual exclusion will be small solace to taxpayers if Congress fails to take action on the scheduled drop in the lifetime gift tax exemption from $5,120,000 to $1,000,000 for 2013.

Many are under the impression that this $13,000 ($14,000 next year) is all they are "allowed" to give. Not so. This is a very common misconception.

$13,000 per donee per year is the limit for making gifts and not filing a gift tax return. Note that I said filing a gift tax return, not paying a gift tax. In addition to the $13,000 annual exclusion there is also a life-time exemption from the gift tax. For 2012, the exemption is $5.12 million. That means you can make gifts up to $5.12 million before you have to pay any gift tax. Any exemption remaining when you die can be used as an exemption from the estate tax.

When gifts exceed $13,000 per donee ($14,000 in 2013), a Form 709, Federal Gift Tax Return must be filed. The purpose of filing a Form 709 is to keep track of how much of the lifetime estate and gift tax exemption you have used. For example, if you give you daughter $30,000. $13,000 qualified for the $13,000 annual exclusion. You have made a taxable ("taxable" not "taxed") gift of $17,000. Reporting that gift on Form 709 will show that you now have $5,103,000 of your lifetime exemption remaining to be used. If you make the $30,000 gift in 2013, $14,000 will qualify for the annual exclusion. Since the estate and gift tax exemption falls to $1 million in 2013, your will have $984,000 of your exemption remaining to be used.

Here are some of the other important inflation adjustments from the IRS:

  • The contribution limit for employees who participate in 401(k), 403(b) and some other plans will increase to $17,500 from $17,000. The "catch-up" contribution limit for workers age 50 and above remains unchanged, at $5,500.
  • For taxpayers making deductible contributions to traditional individual retirement accounts, the upper income limit rises to $115,000 from $112,000 for married couples filing jointly ($69,000 for singles) if the worker is covered by a workplace retirement plan.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the upper income limit rises to $188,000 of modified adjusted gross income (AGI) from $183,000.
  • For taxpayers making contributions to a Roth IRA, the upper income limit is $188,000 of AGI for married couples filing jointly ($127,000 for singles), up from $183,000 in 2012.
  • The amount used to reduce the net unearned income reported on a child's tax return subject to the "kiddie tax," is $1,000, up from $950 for 2012.
  • The foreign earned income exclusion rises to $97,600, up from $95,100 in 2012.
  • The annual exclusion for gifts to a spouse who is not a citizen of the United States increases to $143,000 for 2013, up from $139,000 in 2012.
  • If you have a health savings account (similar to a medical IRA), you must pair it with a high deductible health plan. For 2013, the deductible for single coverage must range from $1,250 to $3,250 with an annual out-of-pocket maximum of $6,250. For family coverage, the deductible range is $2,500 to $6,450 with an annual out-of-pocket maximum of $12,500.

The Social Security Administration announced that the Social Security wage base for 2013 will be $113,700 (up from $110,100 in 2012).

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