2022 AFBA Financial Planning Guide

designated combat zone or hazardous duty area for any part of the month. If you are a commissioned officer, the exclusion is limited to the “highest rate of enlisted pay” (plus imminent danger/hostile fire pay) for service in a combat zone. In addition, the deadline for filing a return is extended by 180 days from the last day of service in a combat zone or designated hazardous duty area. If a service member is killed in a designated combat area or dies from wounds or disease incurred while in the area, the member’s tax liability is waived for the year of death and any earlier year which included service in the designated zone. 15–5. STATE INCOME TAXES. You are subject to the state income tax imposed where you claim your legal residence. At present, a total of forty–three states plus the District of Columbia have some form of income tax. States which do not impose an income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. While the states of New Hampshire and Tennessee do have a tax, it is primarily on business and dividend income. Most states have joined a federal government program that provides information from the IRS on income reported by taxpayers within their state. In addition, most states that impose an income tax have authorized the federal government to withhold state taxes from earnings of military personnel who claim residence in that state. If your state has an income tax, you (the taxpayer) are responsible for contacting the state tax authorities for specific guidance on your need to file and any special exemptions to which you might be entitled. The contact information for the state tax authorities is provided later in this chapter. 15–6. FEDERAL ESTATE AND GIFT TAXES. You may transfer property through sale, gift or estate proceedings. If you sell property and have a profit, you are expected to pay tax on that profit — and the tax you pay generally follows your normal tax rate structure. If you transfer property through gift or estate proceedings, you are also expected to pay tax on the transfer. However, the tax on these transfers is subject to a special tax rate structure shown in the chart above right. The most significant provisions of the estate and gift tax law are summarized below: a. Unlimited Marital Deduction. Spouses can transfer between themselves an unlimited dollar value of gifts and estates without paying transfer taxes. This is an important consideration in your financial planning program.

2021 Federal Estate Tax Rates Taxable Amount Estate Tax Rate

What You Pay

$1-$10,000

18% 20% 22% 24%

$0 +18%

$10,001-$20,000 $20,001-$40,000 $40,001-$60,000 $60,001-$80,000 $80,001-$100,000 $100,001-$150,000 $150,001-$250,000 $250,001-$500,000 $500,001-$750,000 $750,001-$1,000,000

$1,800 + 20% $3,800 + 22% $8,200 + 24%

26% $13,000 + 26% 28% $18,200 + 28% 30% $23,800 + 30% 32% $38,800 + 32% 34% $70,800 + 34% 37% $155,800 + 37% 39% $248,300 + 39% 40% $345,800 + 40%

$1,000,000+

b. Gift Exclusion. For 2021, up to $15,000 of annual gift transfers are excluded from taxes. This exclusion is on a per donee basis and can have a significant impact on estate tax planning. For example, assume that a husband and wife have three children, each spouse may give to the children up to $45,000 per year of their accumulated wealth. In total, the couple can give away up to $90,000 of their estate on a tax–free basis each year. c. Unified Tax Credit. Gift and estate transfers are allowed a unified, lifetime exclusion. These exclusions are linked or “unified” in order to ensure that people do not avoid estate tax by gifting their property immediately prior to death. For tax year 2021 the unified exclusion is $11,700,000. The unification of both transfers (gift and estate) means that any tax credit used for gift transfers made prior to death reduces the estate tax credit available at death. Determining Your Transfer Taxes. The procedures required for filing a transfer tax return are very complicated. Consequently, it is recommended that you obtain professional tax advice. This does not, however, prevent you from estimating the amount of tax on either gifts that you make, or on your potential estate. In short, the total amount of your estate and/or gifts is subject to tax after it has been reduced by certain allowable deductions. The most important deduction for the majority of estates is the unlimited marital deduction mentioned earlier. The primary deduction for most

CHAPTER 15: FEDERAL & STATE TAXES

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