The IRS imposes a tax on lifetime gifts, called the “gift tax” made in excess of the annual gift tax exclusion, but it rarely results in an actual tax. The gift tax (on lifetime gifts) is related to the estate tax (on gifts made at death). It was established to avoid lifetime transfers from reducing the estate taxes at death. Any person can give up to the annual exclusion amount (currently $17,000) to as many persons as desired without triggering gift taxes or reporting to the IRS. Gifts to spouses or charities, or payments of tuition or medical expenses directly to an institution do not have to be reported and are not counted towards the annual exclusion. If the gift tax exemption is exceeded in a year, one must file Form 709 with the IRS to report it. One can pay tax at the time, but it is optional.
Taxable lifetime gifts on which tax was not paid reduce the estate tax ex-emption applicable upon death. A person can leave up to $12.92 million to beneficiaries on death without incurring federal estate taxes. Estate taxes involve ALL assets owned by the decedent, no matter how they are transferred. If the assets exceed the estate tax exemption, determine how much estate tax exemption is available by deducting any gift taxes reported and not paid. Then determine the “taxable estate” by deducting expenses, debts owed, amounts passing to a spouse (“marital deduction”), or to charities (“charitable deduction”). If the net is less than the applicable estate tax exemption, no federal estate taxes should be due. If there is an excess, the excess would be multiplied by the applicable estate tax rate to determine the estate tax.
There are other tax ramifications besides the two taxes discussed here, including deferred income tax in IRAs, annuities, savings bonds, etc., and tax basis issues.
Unless a person has greater assets than the applicable estate tax exemption, he or she can likely make unlimited lifetime gifts without triggering gift or estate taxes.
Attorney Michael A. Pyle, of Pyle, Dellinger & Duz, PLLC. 1655 N. Clyde Morris Blvd., Ste. 1, Daytona Beach. Phone: 386.615.9007. E-mail: firstname.lastname@example.org or website: www.pylelegal.com