Understanding Taxes: Not Just for your rich uncle
Warning: If Congress does nothing, the lifetime exclusion for taxes paid for gifts will plunge from its current $5.12 million to $1 million. Most readers likely won’t have a problem with this. Though this might explain why a rich uncle might send you a check this year.
That rich uncle was going to wait until he died to give you part of his fortune. But one of the reasons he amassed his wealth is that he not only paid attention to his income and expenses, but his taxes as well. Right now, if he dies in 2012, his $5 million estate would owe no taxes. All of it would be available to benefit you and the others he cherished in this life.
But come 2013, $4 million of that would be subject to estate taxes and close to half of that fortune would end up in Federal coffers rather than in your bank account. Whether this means your uncle is paying his fair share or his money is being confiscated and redistributed depends on your political leanings. Your uncle thinks the latter. He doesn’t want to take any chances with how the tax winds blow in the next many years.
That’s why he’s writing you and the rest of his nieces and nephews some pretty big checks this year. If he gets the money out of his estate now, it won’t matter what Congress does with taxes next year.
Of course, there are other things for your Uncle to worry about. He’ll certainly need to hold enough back to maintain his standard of living. He may want to use a trust mechanism instead of an outright gift. That’s just the beginning. But he’s smart and has enlisted the services of a good estate attorney, CPA, and financial advisor.
Now, most of you don’t have to worry about gifting $1 million or more. Sure, you may like to have that problem, but your accounts aren’t quite there. And few have a rich uncle that might send a nice Christmas present this year. But there are some lessons here for everyone.
Tax laws change. What was true last year may not be true this year and probably won’t be true next year. Don’t care? Well, look at your paycheck and notice how much of it goes to the Feds in one way or another. Do you care now? Each year the IRS outlines the changes that have occurred in the tax laws. Since taxes affect so much of your income, taking some time to read about it on the IRS.gov website will be time well-spent.
Another issue: you don’t get to keep your stuff. Whether you get to determine where it goes or whether it goes to the government depends on a number of things. But I can boil them down to two things. One: the tax code; and two: your estate plan.
Here’s hoping that a rich uncle remembers you this tax year. I hope you spend some time to learn the basics of the parts of the tax code that directly affect you; get your estate planning in order (or at least started); and become informed about the folks running for office so that you can vote accordingly.
This article was published under the title "Staying in the know on taxes important" in the Wichita Falls Times Record News on September 16, 2012.