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Whether you’re an investment guru with billions to your name or a small business owner who has seen years of hard work finally result in success, you definitely don’t want to see even more of your money eaten away by estate taxes. To combat this, you may be looking to spread the wealth now. This could include gifting your children with the down payment on their new home, buying your mom a new car, or simply writing your nephew a generous check at Christmastime.

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Making large disbursements such as these can be a simple and effective way to reduce your future taxable estate, benefiting your heirs considerably. Here’s why you should consider the annual gift exclusion and how your generosity can be utilized in the most tax-efficient way possible.

What is the annual gift exclusion and how does it work?

Each and every U.S. citizen is allowed to give anyone of their choosing up to $14,000 a year (as of 2017), without incurring either a gift tax liability or being required to report the gift. This means that if you’d like to spread the wealth to your children, you are able to give them as much as $14,000 each per year without any sort of tax implications. Married couples are allowed to compound this benefit, gifting as much as $28,000 to any individual of their choosing without any gift tax being applied.

Example: Let’s pretend that you and your wife have five kids, but are also very close to your best friend’s two children, as well. You have recently retired and sold your company and would like to give them all the gift of a vacation fund this summer. (What a generous fellow you are! By the way, I need a vacation, too…)

As a couple, you and your wife are allowed to give each of your children and each of your friend’s children as much as $28,000, effectively reducing your taxable estate by $196,000 this year. There is no limit to the number of people to whom you can give these annual gifts, and you can do it each and every year. If you were to write them all a comparable check every year for the next ten years, you could easily reduce your estate by $1.96 million… without it counting toward your lifetime gift exclusion or being taxed as part of your estate.

Related: How to Avoid Estate Taxes on Life Insurance Proceeds

Individuals or married couples who make gifts above the $14,000/$28,000 limits do have a reporting requirement, and must file IRS Form 709 on which they tell the IRS about the excess. This does not mean that either the donor or the donee needs to pay gift taxes on the amount over the annual exclusion limit. It simply means that anything above $14,000/$28,000 will count toward the donor’s lifetime gift exemption.

What is the Lifetime Exemption?

Essentially, every American is allowed to give away as much as $5.49 million of their estate (as of 2017), without it being subject to estate taxes. If you are to pass on an estate to your children that is worth more than $5.5 million, they will likely owe taxes on the excess.

So, where does the annual gift exclusion come into play? Well, if you were to give away bits and pieces of your estate on an annual basis, up to the exclusion limit, you would reduce the value of your estate while essentially giving your money away “early.” This means you can bypass some of these taxes and make the money available to others, like your children, right now… when they may need it most. If you give them more than the $14,000/$28,000 limit each year, though, the IRS will keep track of the surplus given, and it will count against your $5.49 million Lifetime Exemption.

Here are some examples, assuming that you have an estate worth $8 million.

Scenario 1: You have an estate that is still worth $8 million when you die, so your heirs will pay estate taxes on approximately $2.51 million of that.

Scenario 2: You and your spouse have been effectively reducing your estate each year, giving each of your children and siblings a $25,000 check at Christmastime. Over the final two decades of your life, you manage to disburse a total of $4 million (8 people, each getting an annual $25,000 check over 20 years).

This means that estate has been reduced to roughly $4 million by the time you pass, which is below the Lifetime Exemption limit… therefore, your heirs will not be subject to estate taxes on the remainder. You’ve just saved your heirs a ton of money.

Scenario 3: You (not you and your spouse) have given each of your four children a $114,000 check every December. The first $14,000 of each check counts toward your annual gift exclusion. The remaining $100,000 of each, though, needs to be reported on the IRS Form 709 and will be tracked as part of your Lifetime Exemption.

Let’s say that you pass away ten years later; you will have given away $4.56 million, reducing your estate to $3.44 million. However, since you went over your annual exclusion each year, you have already used up a whopping $4 million of your Lifetime Exemption. This means that your children will now be subject to estate taxes on $1.95 million of the remainder ($5.49 million Lifetime Exemption – $4 million already gifted = $1.49 million left of your exemption…. $3.44 million estate – $1.49 million Lifetime Exemption left = $1.95 million overage for which taxes are due).

Other benefits of using the gift exclusion

Aside from reducing your taxable estate and saving your heirs money, the other advantage of using the annual gift exemption is sheer simplicity. Using this method you get the perks of:

  • Not giving up control of a large portion of your assets.
  • No administrative costs i.e. trust tax returns/legal set up costs.
  • Only needing to file a gift tax report if making a gift in excess of the annual limit.
  • Control over how much to gift each year.
  • Control over who to gift to each year.
  • No requirement to a make gift every year.

What are the potential issues with an annual gifting strategy?

One possible drawback is that the person you are making a gift to is incapable of managing their financial affairs. In this case, you may want to use a trust to protect them from themselves or creditors. Also, this strategy does not make sense for anyone with a child with special needs. Gifting them money outright may jeopardize their governmental benefits. In that case, the correct way to give to them would be via a special needs trust.

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Finally, a potential issue is if the donor couple has a shorter-than-expected life expectancy, which would diminish the amount given. However, the couple’s untimely death would be somewhat offset by decreased growth in their investments.

The annual gift is a humble but effective solution to wealth transfer. For those of you with larger estates, it can still be an effective tool in your estate planning toolbox.


TAX ReformI’ve been fortunate enough to live on this wonderful earth for 32+ years. During that time, I’ve come to realize two things as certainties.  First, the New York Jets are never going to win a Superbowl in my lifetime and second, taxes are unbearably complicated.

One day, I hope to vote for a President who vows to take care of the former. For now, I’d like to discuss Donald Trump’s first attempt to take care of the latter.

Yesterday, Secretary of the Treasury Steven Mnuchin, and Director of the National Economic Council Gary Cohn, went to the WH briefing room podium and spent a good 20 minutes providing a brief outline of the new tax-cutting plan that they hope to pass through Congress. No timetable was provided (because it’s going to take a while), and specific details were not given (because they don’t know them yet). But the first draft of what Donald Trump hopes will be the new tax code was announced.

If you hate paying taxes, and by some small miracle this (or something close to it) is the plan that passes through the House and the Senate, you can start practicing your smiling now.

Donald Trump’s Tax Cut Policy

Here’s a basic rundown of what the new tax cut policy proposes:

  1. Tax brackets will be cut from seven tiers to three, and the top bracket will be 35%.
  2. The standard deduction for individual and married filers will double.
  3. The only deductions that can be added to a return are the home mortgage deduction and charitable donations.
  4. The AMT tax is phased out.
  5. The death tax (estate tax) will be repealed immediately.
  6. The capital gains rate will be lowered to 20%.
  7. The corporate tax rate will be lowered to 15%.

Let’s tackle these one at a time. We’ll explain how each of them will likely affect a middle class, tax-paying citizen of the United States.

Related: How to Pay Zero Capital Gains Tax When You Sell Your Home

(1) Tax Brackets Simplified

The Donald Trump tax cuts plan proposes to reduce the number of tax brackets from seven down to three. The three levels of taxes would become 10%, 25%, and 35%.  This is a notable simplification of the current tax code, with brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

What is likely to happen is that the brackets will merge, meaning the first two income groups will now move into the new 10% bracket (currently 10% and 15%), the next three merge into the 25% tax bracket (currently 25%, 28%, and 33%), and the top two merge into the new 35% tax bracket (currently 35% and 39.6%).

For a married couple that earns $200,000 in taxable income in 2017, the federal taxes owed would be $42,884.50 with the current brackets. That same couple in the new tax brackets above would pay only $38,615.00, which is a savings of just over $4,000.

(2) Standard Deduction Bump

The standard deduction is one that most tax filers take. For 2017, it is currently set at $6,350 per person and $12,700 for individuals. This means that if you don’t have a lot of deductions to claim on your tax return after this year is done, you can simply take the “standard deduction” and reduce your taxable income by this amount. The newly-proposed standard deduction is $12,000 for individual filers and $24,000 for married filers, though, making it nearly double what we see right now.

Effectively, this means that the first $12,000 of every tax filer’s income is earned federal income tax free. So, for those earning less than $75,000 a year (who would likely fall in the new 10% income tax bracket), this is a savings of $565 per person. My mother and father, God bless ’em, have taken the standard deduction every single year, so this one feature of the tax cuts plan would add $1,100 to their wallets each and every year.

(3) No More Deductions

Now, the bad news. To offset the savings, Donald Trump and his economic team have decided to remove all deductions, except for the mortgage interest deduction and charitable donations.

Anyone who doesn’t routinely take the standard deduction could potentially suffer a bit on this front. Of course, it mostly makes sense to itemize if your eligible deductions are higher than the standard deduction. With the standard deduction being raised, however, this might be a moot point for a lot of people. If you were itemizing in years past because your deductions were a couple thousand dollars over the standard deduction, they should now be below that line… meaning that itemizing is no longer your best option anyway.

Some of the most common deductions that will disappear are:

  • Moving expenses to take a new job
  • State income tax
  • Student loan interest
  • Home office deduction
  • Property taxes
  • Self-employment tax

I can tell you that from the list above, my wife and I take FIVE of those deductions every year. The total of them is greater than the new, proposed standard deduction of $24,000 so, unfortunately, this means we could be paying a little bit more in taxes due to the removal of deductions.

Related: How to Calculate and Pay Quarterly Self-Employment Taxes

(4) Alternative Minimum Tax Phaseout

Essentially, the government says to every high-earning tax filer, “No matter how good you think you are at saving money on your taxes, we’ve got you.”

The Alternative Minimum Tax (AMT) is a safeguard of sorts for the IRS, which makes higher income earners run their taxes twice. Once through the regular tax code and again through the AMT tax code. Whichever number is the highest is the amount of taxes they need to pay. This particular tax has generated tens of billions of dollars in revenue over the years from skilled tax loophole extraordinaires, who would have otherwise avoided a large(r) tax payment.

No specific details were discussed by the White House just yet, in terms of how the AMT would be phased out. However, simply using the term “phase out” would suggest that it will take a few years before the tax is repealed entirely.

(5) Bye Bye, Death Tax

While the death tax gets a lot of publicity, it affects only around 0.2% of Americans. When someone with less than $5.49 million in assets passes away, they can transfer their wealth to their loved ones, tax-free. However, for those with assets greater than that amount, a very heavy estate tax of between 18% and 40% is imposed on what their heirs inherit. Twelve different tax brackets were created for the estate tax (why they needed that many, I have no idea) but the new tax cuts proposal would axe the whole thing immediately.

My personal assumption? The annual gift tax limit— which allows people to give no more than $14,000 to anyone they want each year tax-free–would also be removed as a result of the removal of the estate tax.  Again, this is simply my assumption… there’s no fact-based evidence to back it up just yet.

(6) Capital Gains Rate Down

A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. What was that?

I know it sounds complicated, but as an example: let’s imagine that you decided to buy $50,000 in either Apple stock or a fixer-upper home. When you go to sell either of those, you may be subject to capital gains taxes. The capital gains tax kicks in on any profit made from the sale of your Apple stock or home renovation project… so if either of them are worth more than $50,000 when you sell, you’re taxed on the growth (or gain).

Related: What I Learned from Flipping a House (and Why I’ll Never Do It Again)

The highest capital gains tax rate is currently 28%, but the Trump administration has said it wants to reduce that rate to 20%. This is a tax cut that is most likely to affect wealthy filers, as heavy profits made from investments would be taxed at a lower rate. However, this would also impact some small business owners and entrepreneurs, such as SPEC home builders.

(7) Corporate Tax Drop

The current corporate tax rate has a few brackets of its own, but any company that earns more than $335,000 falls into the 35% tax bracket. One of the biggest talking points of Donald Trump’s campaign was reducing the corporate tax rate to 15% to make companies in the United States more competitive. After a few months of, ”Well, maybe we’ll get it to 20%,” the decision was made to attempt a tax code overhaul where the corporate tax is 15%.

The immediate effect this has on the US taxpayer would not be found in their tax filing, but rather in the general overall health of the US economy. A lower corporate tax rate is likely to bring more overseas companies back to the United States, which means more jobs and higher-paying jobs for those already here. Small businesses would also see higher margins, allowing for an increased ability for growth, expansion, and hiring.

Related: How to Minimize Capital Gains Taxes on Investments


Doesn’t it all sound terrific? Well, the truth of the matter is that what you see above and what is to become legislation–if it becomes legislation at all–will probably be very different. Concessions are likely to be made, both to appease the House and Senate and to ensure the US doesn’t increase the deficit to the point of no return.

Three brackets may become four, the corporate tax rate may go from 15% to 25%, and the Alternative Minimum Tax may simply be reduced rather than phased out. No matter what, though, getting tax reform passed this year is something that most American would welcome with open arms.

We’re a long way away from the finished product. So, put your feet up, relax, and enjoy the show! It’ll be a while.


Though I’ve lived in the D.C. area for the past 5 years, I still haven’t bought a home here. It just hasn’t made sense yet, especially since I’m not sure how many more years I’ll choose to stay in this area. The properties I do own are located back in Texas and stay consistently rented out. The two of them combined cost less than one comparable home here in northern Virginia, and that’s only talking about the actual property value, so I’m quite content with the arrangement for now.

I’m not yet sure if I’ll ever move back to the land of affordable homes. Either way, one thing is for sure: it’s hard to discuss the cost of setting down roots in D.C. without talking about property taxes. The biggest surprise, though? While it’s exponentially more expensive to buy a home here versus Texas, the property taxes are actually quite a bit lower!

This is pretty fresh in my mind right now, too, as I received a tax assessment notice in the mail just yesterday. For the third year in a row, one of my properties’ values is climbing up again. Last year, for instance, it jumped $5,000; this year, it’s climbing another $8,000. While this might be good news if I were looking to sell sometime soon, it’s not good news for a long-term rental property. A higher assessment, of course, means higher property taxes. And higher property taxes mean less money in my pocket.

Don’t Blindly Pay, Especially With an Increase

With high or climbing property tax rates, it’s worth the effort to try to reduce those rates, if at all possible. After all, when filing personal income tax returns, taxpayers look for every deduction and credit, often saving hundreds or thousands of dollars. However, most homeowners simply accept their property tax bill without questions, even though it could easily be a bigger bill than their income taxes.

Related: 30 Things to Budget for When Buying a Home

With the stress of income taxes done and behind us, now is the perfect time to take a look at your property value and the accompanying tax bill. The amount of property tax you owe is based on an assessed value of your house, and local governments typically assess properties every 18 to 36 months. This means that, depending on where you live, your assessment could have been performed when the market was at a peak. Add to it that the average assessments lag behind current values by about three years, and there is plenty of room for real-time error.

What If You Don’t Agree With the Assessment?

Homeowners could save thousands of dollars with a successful appeal if they only set aside a little bit of time to dispute the bill.

Of course, we’d like to think that our home values continue to increase because we want to feel that the decision to buy a home will result in a good investment over time. When it comes to assessments for tax purposes, though, it’s better to have the lowest value possible. Review your recent assessment, and consider these factors for appeal:

  • Comparable home prices. Look at actual sales of houses in your area. Knowing the current market is a key to determining a fair assessment for your house.
  • Age of the assessment. If the assessment is from over a year ago, comparable homes in your area might have sold for less money more recently.
  • Room count and layout. Most assessments are accomplished without definite knowledge of your house’s layout. There could be mistakes in your assessment that result in a higher value on paper, like too many bedrooms. If your basement is unfinished, you could also argue for a lower assessment
  • Amenities. When assessments are based on comparable home prices, you could be unfairly taxed if your home doesn’t have the same amenities as your neighbors’ houses. Don’t have a pool like the houses surrounding yours? Then, you shouldn’t have the same property tax bill.

After you receive notice of your newest assessment, review it quickly and appeal right away. You’ll be filing what’s called a Notice of Protest with your county’s ARB, or appraisal review board. Even if you would prefer to resolve your concerns informally — many appraisal districts will work with you directly to review and resolve your objections — filing this notice in time is still important, as it retains your right to escalate your dispute to the ARB at a later date. You typically have 30 days from the date the appraisal district mailed your new assessment notice to file your dispute.

You’ll want to review the property record card and look for inaccurate details. You can also take photographs of relevant features of your house and look at documentation for comparable home sales in your neighborhood. Make notes of any improvements you have made, as well as anything that may have depreciated your home’s value (a foundation shift resulting in structural damage, for instance, or mold remediation).

The ARB will typically give you about 15 days’ advance notice of your hearing, though you can occasionally postpone this to a later date, if needed.

When you have your hearing, bring all this documentation to support your case, along with copies to pass along to the board members and district representative. When presenting your case, try to keep emotional pleas out of your argument, and just stick to the facts. Firmly but respectfully present your reasoning, and hope for the best.

If you are unhappy with the decision of the district or the appraisal board, you can take your case even higher. In many states, you have the option of appealing to the state district court in the county where your property is located. Be sure to check your individual appraisal district’s options, by looking online or calling the local tax assessor-collector’s office.

It Doesn’t Hurt to Try

Authorities are aware that most assessments are inaccurate, but they won’t do anything about it unless homeowners speak up. Some homeowners are unsuccessful with the first appeal and simply give up — however, I would suggest that pressing on is worth the fight, especially if you’re paying high (or markedly increasing) taxes.

The county certainly isn’t going to do you any favors; if you want to lower your tax bill, it’s going to take some effort. The savings from a successful appeal could be substantial, though, so don’t give up until your home’s value is accurately assessed.


It’s a good thing I’ve been saving a good portion of my income for the past year. Even with making estimated tax payments — the last of which was due on January 16 — I still have a significant tax bill this year, thanks to increased income.

Many taxpayers dread filing their taxes, even if they receive a refund from the IRS. It’s often a time-consuming process that can be fairly stressful. Plus, pressing Submit on your electronic return (or licking the stamp of your paper return) can bring out fears and anxiety over the possibility of an audit, no matter how diligent you were about your records.

Some people, like me, have a stronger reason for the lack of anticipation: we will end up owing money. And for those who haven’t saved enough money throughout the year, this is a dreaded situation.


What If You Can’t Afford Your Tax Bill?

First of all, you don’t want to owe the IRS money. This type of debt is one of the hardest types to erase. There is no statute of limitations on IRS debt, either, so it won’t just go away on its own if ignored long enough. Even if you declare bankruptcy, it’s very difficult to get rid of tax debt.

Related: How to Adjust Your Witholdings for a $0 Return

Sometimes taxpayers receive a notification saying they owe money, but it might not be accurate. The IRS is a system subject to human error, just like any other agency. You can dispute the amount you owe if it doesn’t match your records and you have a reason to believe your calculation is correct.

Need More Time to File? How to Get an Extension on Your Taxes

The government is sensitive to the issue of whether you can afford to pay, so they’re willing to work with you a little bit. The best option is to avoid using a credit card to pay your debt, which would ordinarily be many consumers’ first choice. When you file your taxes, don’t pay online at that time if you can’t afford it in cash. Instead, wait until after you submit your form and it’s accepted by the IRS. Then, visit the IRS website to file an Online Payment Agreement.

If you take long enough, the IRS will send you a tax due notification, but there’s no need to wait for that to arrive. If you have your adjusted gross income (AGI) from your tax return, the amount you owe, and, of course, your Social Security number, you can get started. The form will first ask you how much you can pay and when you can pay it. Then, it will come up with a payment plan that works for you.

The payment plan will allow you to spread your tax bill out over a longer period of time. This improves the chances that paying your bill won’t cause you a financial hardship, and the IRS still manages to collect the monies due —  a win-win in their book. There is a fee for creating a payment plan, ranging from $43 to to $225.

If your financial hardship is only temporary, the IRS may delay collection, though interest and late fees will still be added to your bill. The IRS could also file a federal tax lien, even if they delay collection. This means your property could become property of the government in order to satisfy your debt.

The last line of negotiation with the IRS is an Offer in Compromise. There are only a few situations in which the IRS will accept a lower tax payment than what they believe is due. If the IRS believes you’ll never be able to satisfy your tax liability, but you agree to the amount you owe, an Offer in Compromise might satisfy the IRS.

If there is legitimate doubt about the tax bill — this will usually happen only in complicated situations — the IRS might consider an Offer in Compromise. Also, if you could afford your tax bill, but paying it would create a significant economic hardship, the IRS might consider an Offer in Compromise for you, as well. This is only in exceptional circumstances.

Because the IRS does charge you interest and penalties when you don’t pay in full or on time, the best solution is to pay the bill in full as soon as possible to reduce these extra costs, even if you agree to payment plans. I prefer the above options over other payment types (such as a high interest credit card) when cash isn’t available at the time the bill is due. However, the IRS offers these additional suggestions:

I’m not a big fan of any of these, but it is important to take care of your IRS debt above many other financial priorities.

Have you ended up with a big tax bill you couldn’t immediately pay? What was your plan of action?


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Last year, the city of Philadelphia decided to pass into law a “beverage tax,” which taxes the sugary drinks you consume at the rate of 1.5 cents per ounce.  At the time, there was some considerable outcry from residents of the city. Nevertheless, the government stuck to their guns. Well, at the turn of this new […]

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Credit Karma is Offering 100% Free Tax Software – Look Out Turbo Tax

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The first time I filed my very own taxes was with Turbo Tax, back in 2003. I was 18 years old at the time, attending college, and it was the first year my parents could not claim me as a dependent. I had earned a fair amount of income from my jobs on campus (and […]

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