Slott Report Mailbag: What Does the Tax Code Deem a Personal Exemption?

Thursday, June 27, 2013

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag discusses several topics dealing with the 2013 tax laws, including limits on personal exemptions and the gift tax exemption. Several of these questions require complete understanding of NEW tax laws, so make sure your financial advisor is verse in the latest tax law updates. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1. What does the tax code deem a personal exemption? I heard that the new tax law curbs them at certain levels.

Thanks,

Marcus

Answer:
The tax code allows that a certain level of income, called a personal exemption, should not be taxed. You get a tax deduction for yourself, your spouse, and your dependents such as your children.

As part of the new tax law, personal exemptions of joint filers with AGI (adjusted gross income) over $300,000 and single filers with AGI in excess of $250,000 will begin to be reduced.

2.

Talking heads are saying the gift tax exemption became even more advantageous thanks to the new 2013 tax law. What makes it even better now than before?

Answer:
The lifetime gift tax exemption is now $5,250,000, up from $5,120,000 last year. In addition, portability, which is a rule allowing a surviving spouse to add any unused exemption amount from his/her spouse to his/her own exclusion amount, has been made permanent.

The annual gift tax exclusion amount for 2013 is $14,000, up from $13,000 last year. You can give up to $14,000 a year to as many people as you wish, totally free of any gift tax. The reason for the increase is to reflect inflation.

3.

I’m age 51, have a 401(k) plan, and would like to withdraw money penalty free for a down payment on a first home. Can I do that?

Best – David

Answer:
No. The exception to the 10% early distribution for first home purchases applies to IRAs only; not 401(k)s. However, if you’re entitled to take a distribution from the 401(k), you could roll over the funds to an IRA and then take a penalty-free IRA distribution from there, assuming you meet the other first-time homebuyer penalty exception rules.
 

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