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The holiday season is a time of giving, but as you celebrate this time with your family and friends, you may need to be aware of a certain omnipresent aspect of American life: taxes. While it will likely only apply to people who earn a high income or have large financial assets, it is still a good idea to understand the Federal gift tax and the impact it may have on the gifts you give and your estate.

What Is the Gift Tax?

When a person transfers property to someone else without receiving something of equal value in return, this is considered a gift by the Internal Revenue Service (IRS), and it may be subject to gift taxes. The person who gives the gift to someone else (known as the donor) is responsible for filing tax forms for the gift and paying the gift tax.

Gift Tax Exclusions

Certain types of gifts are excluded from taxes, including gifts given to one’s spouse, gifts given to a political organization, and tuition or medical expenses paid on someone’s behalf. For other gifts, an annual exclusion threshold applies. That threshold is $14,000 for 2017, and the threshold for 2018 will be $15,000.

The annual exclusion applies to gifts given to an individual person, so if a donor gives multiple people gifts of less than $14,000 each, they will not owe any gift taxes. For spouses, the exclusion is doubled, so a married couple can give a gift of up to $28,000 without owing gift taxes.

In addition to the annual exclusion, everyone is entitled to a lifetime exemption known as the basic tax exemption. For people who die in 2017, that exemption is $5,490,000, and in 2018, the exemption will increase to $5,600,000. The taxable amount of gifts greater than the annual gift tax exclusion threshold can be applied toward this lifetime exemption, and taxes will not be owed on these gifts. However, any amount of the basic exemption used during one’s lifetime will be deducted from the amount of their estate that is exempt from estate taxes upon their death.

Contact a Schaumburg Estate Planning Attorney

Determining how gift taxes will affect your finances and your estate can be a complex undertaking. If you want to make sure you are protecting yourself and providing for your family’s financial security, the skilled attorneys at Drost, Gilbert, Andrew & Apicella, LLC can work with you to ensure you have met your legal requirements and have the financial resources in place that your family needs. Contact our Rolling Meadows estate planning attorneys today at 847-934-6000 to schedule a personalized consultation.

The Affordable Care Act (ACA or "ObamaCare") is a sweeping reform that touches many different areas of the law. One particular area that it impacts is the income tax structure. The law makes many small changes, such as increasing the threshold for deducting a medical expense to 10 percent of a person's adjusted gross income, or adding a new 0.9 percent tax to wages above $200,000. 

But, one particular change can have a large effect on income from real estate sales and trusts. The ACA adds a new 3.8 percent tax on a person's net investment income. But, this new tax only applies to certain people, and often, but not always, those in higher tax brackets.

The Effect on Real Estate Sales

The 3.8 percent tax applies to some sales of real estate, but not to all sales. First, the tax only applies to people making more than $200,000 a year or $250,000 for married couples filing jointly. Even for those people, not all sales qualify. This is because the first $250,000 of profit on the sale of the home does not count as income if the home is the person's primary residence.

And, that number goes up to $500,000 for married couples. A primary residence is a home that has acted as the sellers “main home” for two of the last five years. By way of example, suppose a married couple making over $250,000 a year sold their primary residence for a net profit of $650,000. They would only pay the 3.8 percent tax on the $150,000 in profits that exceed the $500,000 cap.

The Effect on Trusts

Even though the tax only applies to individuals making more than $200,000, it can also affect trusts with more than approximately $12,000 in net investment income, regardless of the beneficiary's income. This means that the tax can affect people earning less than $200,000 if they have an interest in such a trust. In this instance, the 3.8 percent tax applies to all net investment income in excess of the $12,000 cap. However, the law contains many exemptions and exceptions. For instance, certain types of trusts that do not qualify as trusts for purposes of income tax also fall outside of this law.

If you have questions about how the ACA affects your taxes or think you may be subject to the new net investment income tax, contact an Arlington Heights tax attorney today. Call 847-934-6000 to speak to a member of our team. We serve many Northwest Suburban areas including Rolling Meadows, Des Plaines, Crystal Lake, and other nearby communities.

About the Author: Attorney Jay Andrew is founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.