The estate tax, commonly referred to as the death tax, was made permanent in the Internal Revenue Code as part of the American Taxpayer Relief Act of 2012. The tax passed on Jan. 1, 2013. The tax exemption amount changes every year and the change is based on inflation. When it was first made into law, the exemption amount was $5 million. For 2017, the exemption amount is $5.49 million. The estate tax is combined with gift taxation policies and was put in place to keep wealthy people from giving away their estates during their lifetimes in order to avoid the 40 percent federal estate tax.
The Annual Gift Tax Exclusion
The annual gift tax exclusion also changes every year, though it has been stuck at $14,000 since 2013, and is $14,000 for 2017. Taxes are paid on gifts by the gift giver (the donor). Each donor may give $14,000 to any number of individuals each year. However, if you give your child – yes, family members count – $16,000, you would have to pay tax on the $2,000 overage. If you have three children and any number of friends you want to give gifts to, each may get $14,000 per year without the donor being subject to tax on that money.
Exceptions to the Rule
Some places are exempt from the rule. This means that if you give over $14,000, you are not taxed.
Educational and Medical Facilities
Educational and medical gifts, regardless of size, are not taxed. However, you must donate directly to the institution. And, with educational gifts, the gift must be used for tuition. If it is used for books, living expenses, lodging or anything else, it is taxable after the first $14,000.
Charities and Political Organizations
You may also give money or possessions to some charities without incurring the yearly gift tax, should you go over the exemption. The charities must meet standards set by the Internal Revenue Code. Additionally, gifts to political organizations are not taxed.
Gifts to your spouse are not counted. You could give your spouse $10 million a year and it would not be taxed.
How Gift Taxation and the Estate Tax Works Together
You may have been wondering what the estate tax has to do with the gift tax. It provides a vehicle to get around paying yearly gift taxes if you give more than $14,000 to any one person during the year. If you decide to give your child $50,000 for a wedding gift, if you played by the rules, $36,000 of that would be taxable.
However, if you are married, you and your spouse may each give your child $14,000. To keep the record straight, it should be in two different checks – one from each of you for $14,000. That brings the total up to $28,000. At this point, $22,000 would be taxable. However, you may allocate that $22,000 toward the lifetime estate tax exemption. You would have $22,000 less to give at your death, but that is only a concern if your estate is worth more than the estate tax exemption for the year you die.
Definition of “Gift”
For tax purposes, a gift is any transfer of anything of value to another person wherein you do not receive full consideration. If you give someone $15,000 in exchange for services that the receiver would normally charge $15,000 for, that is not a gift since you received services worth that amount.
If you are giving a gift of physical items, such as real property or personal property, the value of the gift is fair market value. The fair market value is the reasonable price that you would ask for the item if you were selling it, and what the buyer would pay for that item.
You’ll need to complete Form 709 if you give a gift that is over the annual exemption amount. If the gift was anything other than cash, you should be prepared to submit copies of appraisals and other relevant documents that are related to the transfer.
The gift tax and estate tax laws become quite complex in that there are other ways to gift to avoid taxes. You also have the option of setting up certain types of trusts to help avoid part of the estate tax. If you plan on gifting a significant amount or have children getting ready to enter college, contact France Law Firm to discuss the gift tax, estate tax and to create an estate plan that benefits you and your family.