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T14: GIFT AND ESTATE TAXES IN USA

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Gift Tax and Estate Tax in the USA

Gift Tax

The US federal gift tax applies to the transfer of money or property when there is no consideration or the consideration is less than the full value. This includes situations like selling something for less than its value or making interest-free or reduced-interest loans.

General Rule

Any gift is generally considered a taxable gift. However, several exceptions apply:

  1. Annual Exclusion:

    • Gifts up to the annual exclusion amount, which is $15,000 per recipient for 2020, incur no tax and do not require filing.

    • Married couples can give up to $30,000 per recipient by splitting their gifts.

  2. Education and Medical Expenses:

    • Payments made directly for someone’s tuition or medical expenses are not considered taxable gifts.

  3. Gifts to Spouse:

    • Gifts to your spouse are not taxable.

  4. Gifts to Political Organizations:

    • Contributions to political organizations for their use are not taxable.

  5. Gifts to Charities:

    • Gifts to qualifying charities are deductible from the value of the gift.

Exemptions

There are two levels of exemption:

  • Annual Exclusion: Gifts up to the annual exclusion amount.

  • Lifetime Exclusion: Gifts exceeding the annual exclusion may be tax-free up to the lifetime estate basic exclusion amount, which was $11.58 million for 2020.

Filing Requirements

  • Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return must be filed for any year in which gifts exceed the annual exclusion limits.

  • Tax Payment: Generally, gift tax is payable only if the accumulated gifts exceed the lifetime exclusion threshold.

Estate Tax

The estate tax applies to the transfer of property after death. This includes cash, securities, real estate, insurance, trusts, annuities, business interests, and other assets.

Calculation

  • Net Taxable Estate: Certain liabilities are deducted to arrive at the net taxable estate amount.

  • Add Lifetime Taxable Gifts: The value of lifetime taxable gifts is added to the net taxable estate.

  • Tax Computation: Tax is computed on the total and reduced by the available unified credit.

Filing Requirements

  • Form 706: United States Estate (and Generation-Skipping Transfer) Tax Return must be filed if the gross taxable assets, including prior taxable gifts, exceed a certain amount, which was $11.58 million for 2020.

  • Marginal Tax Rate: The marginal tax rate on gift and estate taxes is 40%.

Link Between Gift Tax and Estate Tax

Gift tax and estate tax are interconnected and generally payable only when the estate or property transferred at death, after adding lifetime taxable gifts, exceeds approximately $12 million.

For more details refer IRS site https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes

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