OVERVIEW OF 2015 FEDERAL AND MARYLAND TAXES
AND RELATED PLANNING CONSIDERATIONS
A. Federal Estate Tax Exemption. The federal estate tax exclusion amount currently is $5.43 million – for 2015. The federal estate tax rate on estates in excess of the exemption amount is 40%
B. Maryland Estate Tax Exemption. Maryland increased its estate exemption effective 2015. The top tax rate is 16%. Increases in the exemption amount will phase in until it equals the federal state exemption in 2019, as follows:
Year of Death Exemption Amount
2015 $1.5 million
2016 $2 million
2017 $3 million
2018 $4 million
2019 [Federal Exemption, currently $5.43 million]
“Pick-Up” Tax Considerations.” The Maryland estate tax is a “pick-up” tax. This means Maryland essentially relies on federal estate tax law to define the taxable estate, – with some minor exceptions. One may not, logically, take the federal deduction for payments of state death taxes to reduce the Maryland estate tax take any deduction for an expense that’s also deducted on any income tax return. “Qualified agricultural property” also enjoys special, favorable treatment in Maryland, up to the first $5 million worth of “qualified agricultural property,” as long as the land continues to be farmed over the subsequent ten (10) years.
C. Maryland Inheritance Tax. Who has to pay the Maryland Inheritance Tax? Maryland is one of only two states that impose an estate tax and an inheritance tax. Although Maryland abolished the inheritance tax for spouses, parents, children (and their spouses and children), brothers, sisters, grand-parents and grand-children, certain beneficiaries are not exempt. Specifically, cousins, nieces, nephews, friends, etc are not exempt and are subject to a 10% inheritance tax.
Same sex couples who are not married are not legally related at all and are subject to the 10% inheritance tax, as are “domestic partners,” whether or not of the same sex, unless they have acted in conformity with the r Maryland rules for individuals in a domestic partnership to avoid the inheritance tax.
The Maryland inheritance tax applies to probate and non-probate property, such as, for example, life insurance proceeds, IRAs, bank accounts with beneficiaries, and jointly titled accounts. The tax is typically payable by the beneficiary, although the Will can provide that it be paid by the estate. Therefore, one should consider the beneficiary’s potential inheritance tax liability and ability to pay it, because if the intended beneficiary cannot afford to pay the inheritance tax, the asset will need to be sold to pay it.
D. Annual Federal Gift Tax Limits. The federal annual gift tax exclusion for 2015 is $14,000. Each person (including spouses) can gift up to $14,000 to any individual a year, to as many individuals as they wish, free of the gift tax. Such gifts to do not count towards one’s lifetime federal gift exemption. One may gift larger amounts free of the gift tax by electing to apply the amount gift against one’s total federal estate tax exclusion amount, in 2015 being $5.43 million, thereby reducing the available exclusion amount at death. The gift tax is tied to the estate tax and so has a sort of inflation indexing effect.
Gifting can be effectively used to fund a 529 College Savings Plan for children or grand-children. One may elect to put up to five year’s worth of the annual gift tax exclusion amount, currently $14,000 X 5 = $70,000, at one time into such a College Savings Plan. One would have to file a gift tax return but there would bo no actual gift tax, – unless other gifts were given to that child during that period.
E. Federal “Kiddie” Tax. The federal kiddie tax applies to the investment income earned by students through age 23. If such unearned income, for 2015, exceeds $1,050, the excess income is taxed at the parents’ income tax bracket. No tax is due on the first $1,050.
F. Alternative Minimum Tax (AMT) Exemptions. The AMT exemption amount for tax year 2015 is $53,600 for individuals and $83,400 for married couples filing jointly. The AMT is permanently adjusted for inflation.
G. Retirement Elective Contribution Limits. The elective deferral limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increased from $17,500 in 2014 to $18,000 in 2015. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $5,500 in 2014 to $6,000 in 2015. IRA Contributions: The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over remains at $1,000.