FEDERAL GIFT & ESTATE TAX BASICS

taxes

 

What is a gift for federal tax purposes?

A “gift” transaction is one in which you give more property than you receive (if anything) in return.  It can be a gift of money or the transfer of a property, like a home for less than fair market value.  Services rendered, like providing homecare or mowing the lawn, do not constitute gifts.

Are all gifts subject to the federal gift tax?

No. Items excluded from gift-tax liability include the following:

  • Gifts under the annual exclusion amount, $14,000 per recipient per year in 2016.
  • Gifts made between spouses.
  • Contributions to charity.
  • Political contributions.
  • Transfers mandated by law (such as alimony, spousal support, fines, etc).
  • Direct payments to an educational institution. The payment must be for tuition – transportation and textbook expenses will not qualify for exclusion.
  • Direct payments to a medical institution – encompasses amounts paid for the diagnosis, cure, prevention, mitigation, or treatment of disease, for transportation, or for the purpose of affecting any structure or function of the body.

When is a gift return required?

A gift tax return is required to be filed on any gifts made of over $14,000 per recipient per year in 2016. Thus, you can make gifts totaling $14,000 to your brother, $14,000 to your mom, and $14,000 to your best friend, without having to file a gift return or incur any gift tax liability.

Suppose the only gifts you make to your son in 2016 are a $500 suit for his birthday, and a $130 shirt and tie combo to go with that suit on the holidays.  You will not be subject to gift tax with respect to your son because the total value of the gifts you made to him is only $630 – well below the $14,000 Annual Exclusion.

On the other hand, suppose that in 2016 you make a single gift to your daughter – a $20,000 car for her 16th Birthday.  Under the 2016 Annual Exclusion, $14,000 of the car’s price falls under the gift tax exclusion.  However, the $6,000 excess above $14,000 will require a gift tax return and will be counted towards your lifetime gift exclusion of $5,450,000 in 2016.

The Federal Gift Tax Return, Form 709, must be filed in the year in which you make gifts in excess of the annual gift exclusion.  The filing of form 709 is required regardless of whether you anticipate having a sum total taxable estate and taxable gifts in excess of the lifetime exclusion amount at the time of your death.

What if Spouses Make a Gift Together?

Spouses may elect to have a gift treated as being made 50/50 by each of them, but only if they both consent to the election.  This allows the annual exclusions of both spouses to apply to a given gift, for an aggregate Annual Exclusion amount of $28,000.

Consider our earlier hypothetical with the gift of the $20,000 car you gave to your daughter.  You would have the option to elect, with your spouse, to have both of your annual exclusions apply to the gift, for a total applicable Annual Exclusion amount of $28,000.  Thus, the gift of the car would not result in the necessity of a gift tax return filing, since $20,000 would fall below the total annual exclusion amounts available to both you and your spouse with respect to your daughter.

What is an Estate for Federal Tax Purposes?

A gross estate includes all property that belonged to the decedent on the date of death.

What is the Federal Gift and Estate Tax?

The estate tax and gift tax share the same exclusion amount under the tax code.  In 2016, the exclusion amount is $5,450,000. The exclusion amount is applied against and reduces the amount of tax due at death on both your estate and the total of taxable gifts that you made during life.  Thus, for example, if the sum of the taxable estate and taxable gifts for someone dying in 2016 falls below the $5,450,000 exclusion amount, they will have not have any estate or gift tax liability.  Remember that any gifts made below the annual gift exclusion, $14,000 per recipient per year in 2016, is not applied to the total.

When is a Federal Estate Tax Return Required?

The filing of a federal estate tax return is required for estates with combined gross assets and prior taxable gifts exceeding $5,450,000 in 2016.

In a Nutshell

With the lifetime exclusion amount of $5,450,000 in 2016, most people will never have to worry about paying federal gift or estate taxes. However, many people will be required to file a gift tax return at some point in their lives related to a gift of money or transfer of property. For more information regarding Federal and Estate Taxes, contact a Cleveland Estate Planning Lawyer.