Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

The gift tax: Frequently asked questions part 2

When you present gifts to family and friends, probably the last thing on your mind – or theirs – is gift tax. For this reason, the gift tax often is often overlooked, and the average person does not know much about it. Here are more FAQs to get you familiarized with them.

Don’t miss: The gift tax: Frequently asked questions part 1

  1. How much is the gift tax and when do I pay it?

The gift tax and the estate tax are currently combined and bear a hefty 40% tax rate. However, in addition to the annual gifting exemptions, there is a lifetime exclusion that applies to gifts made during your lifetime and bequests at death, totaling $11,700,000 per person in 2021. For example, let’s say that during your life, you gave away $5 million in property to your family (after taking annual exclusion gifts into account), and when you die in 2021, there is an additional $8 million in your estate that your Will or Trust also leaves to your family. Your lifetime gifts total $13 million, and the 40% tax rate will apply only to the amount over the lifetime exemption, in this case $1.3 million ($13 million – $11.7 million).

  1. Can I let others use my unused exemptions?

The only estate and gift exemption that is transferrable is the lifetime exemption, and this is only portable to a surviving spouse. For example, say a couple in Arizona are jointly worth $15 million, have never gifted in their lives, and everything they own is community property. In 2021 the husband dies. Half of their joint net worth is considered to be owned by him, and his estate at death is $7.5 million. Of this $7.5 million, he leaves $1.7 million to their children and $5.8 million to his surviving wife. Gifts to spouses are exempt from the gift and estate tax (see question #3) meaning that he has only used $1.7 million of his lifetime exemption and $10 million is unused. An estate tax return can be filed to “port” that $10 million of lifetime exemption to the surviving wife, and on her death (assuming estate tax laws don’t change before then) she would then have $21.7 million of exemption to use (her $11.7M and his $10M).

  1. If I won’t pay the gift/estate tax until I die, why would I file a gift tax return?

Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, should be filed in any year that your gifting exceeds the annual exclusion amounts. Throughout history, the estate and gift tax has changed drastically, and it is always a hot topic in the political realm. Filing Form 709 is the most sure way to take advantage of current tax law and prove when your gifts were made. For example, if President Joe Biden cuts the lifetime exemption in half, it will be common to see wealthy taxpayers gift while the lifetime exemption is high so they can make those gifts free of gift tax.

The above is general in nature and should not be relied on. Please consult with a qualified tax professional for advice.

Haley M. Braun, CPA