¶ … Smiths to Minimize Their Total Tax Liability
Mr. and Mrs. Smith's concerns about their future income and estate tax bills are important because of their need to engage in tax planning, which can be described as organizing personal financial affairs in order to lessen taxes. In light of their concerns and current situation, there are several recommendations or ways with which the Smiths can reduce their future income and estate tax bills. Therefore, your advice to them on tax planning should be based on considerations of these various recommendations in light of their advantages and disadvantages in addressing their concerns.
One of the ways through which the Smith's can minimize their total tax liability is through giving annually, which will help lessen future estate taxes. As of 2015, the federal estate gift and estate tax exemption amount was $5.43 million, which implied that taxable estate exceeding this amount would be subject to estate tax bills at adjusted rates of up to 40% (Massachusetts Financial Services Company, n.d.). Since the value of the Smiths' current estate is valued at $15 million, they would be liable to estate tax rates since the value exceeds the estate tax exemption amount. Therefore, the Smiths can lessen their future income and estate tax bills through giving annually. In this case, the Smiths can give their daughter annual gifts of up to $28,000 given that each donor is allowed to make an annual tax-free gift of $14,000 per recipient. The limit applies to either spouse, which essentially means that a married couple can give a gift of up to $28,000 tax exempt as of 2015. This alternative is associated with some advantages and disadvantages in relation to minimizing the total tax liability. One of the advantages of this option is that it will enable the Smiths to significantly lessen their total tax liability through giving tax exempt gifts to their daughter. Secondly, this strategy would help ensure that the Smiths do not owe any...
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