Tax Breaks Increase For 2002

You’ll be able to give away more money tax free in 2002.

Inflation indexing finally has pushed the annual tax-free gift amount to $11,000. The annual amount has been indexed for inflation since 1997, but adjustments are only to the nearest $1,000.

Tax-free gifts can be made to anyone. You don’t need a relationship with the individual. Gifts are tax-free to the recipient and are not deductible by the giver. Gifts can be made in either money or property. There is no limit to the number of people to whom you can make tax-free gifts each year.

You can increase the $11,000 annual limit by making gifts to pay for someone’s education or medical expenses. There is no limit to the tax-free amount of those gifts. But the payments must be made directly to the party providing the services to qualify for the unlimited exemption.

Also rising for 2002 is the estate and gift tax lifetime credit. This rises to $1,000,000, from $675,000 last year. Gifts that exceed the annual tax-free amounts then reduce the lifetime estate and gift tax exemption before you owe gift taxes. Any part of the exemption not used during your lifetime reduces your estate tax. The lifetime estate and gift tax exemption is scheduled to increase until 2010, when the estate tax is eliminated. But the tax is reinstated in 2011.

Another estate tax bonus is that the top rate falls from 55% to 50%.

Married couples with more than $2 million in assets should be sure each spouse owns enough assets to take advantage of the lifetime exemption of each spouse. If they don’t, it is a simple matter of changing the title from one spouse to another for enough property.

To the extent you can afford it, take advantage of these tax breaks while they are available. We don’t know what will happen with the tax law in coming months and years.