Gift and estate taxes in 2016: What you need to know

Gifts can serve as useful financial planning tools to reduce estate tax burdens.

The Internal Revenue Service (IRS) recently announced an increase in the annual gift and estate tax exemption rates for 2016. In 2015, this limit was set at $5.43 million. In 2016, it will increase to $5.45 million. Financial experts with Forbes and the Journal of Accountancy report that this change is, essentially, an adjustment for inflation. The annual gift tax was not adjusted and remains at $14,000 for 2016.

The use of gifts can serve as a valuable financial planning tool for the wealthy to reduce estate tax obligations. However, if not used wisely, gifting can result in questions from the IRS.

Gift tax: Defined

A gift tax is the tax that is required on certain property that is transferred as a gift. This can occur as a standard gift of cash or property from one person to another or through an inheritance or will. The IRS defines a gift as any transfer given without full consideration received in return. This includes the sale of something at less than full value or the use of an interest-free or reduced-interest loan. When these gifts are made, the person making the gift, known as the donor, is subject to the gift tax.

Each individual donor can give a set amount to as many receiving individuals, or donees, in a single tax year as desired. In 2015 and 2016, this limit is set at $14,000. This means that spouses can each give a gift to an individual, potentially resulting in a gift of $28,000 to the donee.

Gift tax: Exclusions

There are certain exceptions to this rule. Generally payments for another's tuition, medical expenses, gifts to a spouse or gifts that do not exceed the annual exclusion for the calendar year are not taxed.

Another difference exists in cases of foreign gifts. In most cases, gifts to spouses are not subject to the annual exclusion limitations. However, an exception exists if the spouse is not a U.S. citizen. Gifts to a non-citizen spouse can be subject to a gift tax and the amount change annually. In 2016, this limit is set at $148,000.

Taxes and issues: Importance of legal counsel

Those who are using gift taxes or other financial planning strategies to reduce tax obligations may be questioned by the IRS. In these cases, it is wise to contact an experienced IRS investigation lawyer. This legal professional will work to protect your interests and defend your rights.