Gift Tax and Estate Tax

Estate Gift TaxThe Gift Tax and Estate Tax laws are some of the most complicated the IRS has to offer. But don't worry; due to the Gift and Estate Tax exclusions, these taxes currently affect only the wealthiest 2% of Americans. If you do have to pay Gift Tax when filing your tax return, efile.com will make it easy. 

What Is the Gift Tax?

When you give a "gift" of money or property to someone, you may owe a Gift Tax. A taxable gift is considered to be a transfer of any money or property to another person with no expectation of full compensation or repayment of at least equal value. Reduced-interest or interest-free loans may be considered gifts for tax purposes.

What Do I Need to Know About Gift Taxes?

Here are four factors you need to know if you are giving money or property to someone: 

  1. If you give someone a gift or gifts of money or property and the value is over the annual gift exclusion amount, you will generally owe gift taxes.
  2. If you give a gift of property, taxes must be paid on the fair market value of the item (not the purchase price, nor the original value).
  3. You do not have to pay tax on gifts totaling less than (or equal to) the annual exclusion amount ($14,000 per recipient in 2016).
  4. You do not have to pay tax on gifts that qualify for other exclusions (see below).

What Are the Gift Tax Exclusions

There are a number of ways to reduce the amount of Gift Taxes you may owe:

Gifts to Your Spouse: You do not have to pay taxes on any amount given to your spouse as a gift, unless they are not a U.S. citizen.*

Education and Medical Expenses: You will not owe tax on any amount paid for someone else's tuition or medical bills. The payment must be made directly to the educational or medical institution and not to the person receiving the education or medical care.

Charitable Donations: Charitable contributions made to qualifying charities are not only deductible on itemized tax returns, you may also deduct the value of your charitable donations from the amount of Gift Taxes you owe.

Political Contributions: Political donations are considered gifts, not deductible charitable contributions, and you may exclude any amount given to political organizations. The organization must use the money for its own purposes and may not be acting as an intermediary to dispense the funds to a third party.

Business Gifts to Employees: You can deduct up to $25 worth of business gifts you offer to an individual during the year. The following items do not count towards the $25 limit:

  • Identical, widely distributed items of $4 or less that have your name clearly and permanently imprinted
  • Signs, racks, and promotional materials displayed on the recipient's business premises

*The annual gift exclusion for gifts to a spouse who is not a U.S. citizen is $148,000 for 2016.

What is the Annual Gift Exclusion

In 2016, you may give someone up to $14,000 in gifts before paying any gift tax. The $14,000 annual gift exclusion is a limit on nontaxable gifts per person, and you may give multiple people up to $14,000 each without incurring any tax liability. However, the amounts of your annual gift exclusions are limited to a lifetime total of $5,450,000 for Tax Year 2016. 

What is Gift Splitting

Married couples may split the value of gifts given together as a couple, which effectively doubles the annual gift exclusion for joint filers. Married couples may exclude a split gift of up to $28,000 per person per year. If a gift is made of community property, each spouse will be considered to be giving half the fair market value of the gift.

In 2016, the individual gift exclusion of $14,000 is "portable" for married couples. This means that if one spouse does not use up their $14,000 limit, the other spouse may use it.

Learn more about the Gift Tax in Publication 559 - Survivors, Executors, and Administrators

What Is the Estate Tax?

When someone inherits money or property, the transfer may be subject to the Estate Tax. The Estate Tax is commonly referred to as the "Death Tax" because it is the tax paid on the transfer of money and property after a person's death. If the value of your estate is over the current exemption amount when you die, your estate will owe tax on the excess amount at the applicable Estate Tax rate. The Estate Tax is paid according to the tax rates in place in the year of the person's death.

Estate Tax Amount by Year

  • 2016: The Estate Tax exemption amount is $5,450,000 and the Estate Tax rate is 40%. 
  • 2015: The Estate Tax exemption amount was $5,430,000 ($10,860,000 for married couples) and the Estate Tax rate was 40%.
  • 2014: The Estate Tax exemption amount was $5,340,000 ($10,680,000 for married couples) and the Estate Tax rate was 40%.
  • 2013: The Estate Tax exemption amount was $5,250,000 ($10,500,000 for married couples) and the Estate Tax rate was 40%.
  • 2012: The Estate Tax exemption amount was $5,120,000 ($10,240,000 for married couples) and the Estate Tax rate was 35%.
  • 2011: The Estate Tax exemption amount was $5,000,000 ($10,000,000 for married couples) and the Estate Tax rate was 35%.
  • 2010: There was NO ESTATE TAX for Tax Year 2010.
  • 2009: The Estate Tax exemption amount was $3,500,000 and the Estate Tax rate was 45%.

The 2016 Tax Year $5,450,000 exemption amount is a "unified" exemption that applies for the combined values of Gifts, Estates, and Generation-Skipping Transfers. This unified exemption is portable for married couples, so that if one spouse dies before another and their estate does not reach the $5,450,000 limit, the other spouse (or their estate) may use the remaining amount.

What Is the Value of an Estate?

The total value of an estate, called the "Gross Estate", includes everything owned at the time of death. This includes cash, securities, insurance, business interests, property assessed at fair market value (not the original value or the purchase price), real estate, annuities, trusts, etc.

What Are Estate Tax Deductions?

Once you figure out your Gross Estate and subtracted the current exemption amount, there are several ways to further reduce the amount of Estate Tax that you may owe. To determine the amount of your taxable estate, you may deduct any of the following from your Gross Estate:

  • Marital Deduction: This is one of the most popular ways to avoid the Estate Tax. Anything transferred to a surviving spouse may not be taxed.
  • Charitable Deduction: You will owe no tax on any money or the value of any property left to a qualified charity.
  • Mortgage and Debt Deduction: Your taxable estate may be reduced by the remaining amount of your mortgage and other unpaid debts. This gives your heirs some relief from inherited debt.
  • State Death Taxes: If your estate is taxed by a state (or the District of Columbia), you may deduct the amount you paid from your taxable estate.
  • Foreign Death Taxes: If you pay death taxes to a foreign country, you may deduct the amount you paid.
  • Funeral Expenses: You will pay no tax on any funeral expenses that are paid out of your estate.
  • Estate Administration Expenses: You may deduct any amount paid for administration of the estate and also the amount of any losses incurred by the estate during its administration. This includes such costs as attorney fees, appraisal fees, physical storage and maintenance costs, interest expenses incurred after death, etc.

What is the Generation Skipping Transfer Tax (GST Tax)

The Generation Skipping Transfer Tax (the GST Tax) is often referred to as the "Grandparents Tax" because it is the tax charged on transfers of an estate to one's grandchildren or to another relative more than one generation removed from you. The GST Tax also applies to transfers of an estate to a non-relative who is more than 37 and 1/2 years younger than you. The GST Tax is assessed in addition to any Gift or Estate Taxes which may apply.

GST Tax Amount by Year

  • 2016: The GST Tax exemption amount is $5,450,000 and the Estate Tax rate is 40%. 
  • 2015: The GST Tax exemption amount was $5,430,000 ($10,860,000 for married couples) and GST Tax rate was 40%.
  • 2014: The GST Tax exemption amount was $5,340,000 ($10,680,000 for married couples) and the GST Tax rate was 40%.
  • 2013: The GST Tax exemption amount was $5,250,000 ($10,500,000 for married couples) and the GST Tax rate was 40%.
  • 2012: The GST Tax exemption amount was $5,120,000 ($10,240,000 for married couples) and the GST Tax rate was 35%.
  • 2011: The GST Tax exemption amount was $5,000,000 ($10,000,000 for married couples) and the GST Tax rate was 35%.
  • 2010: There was NO GST TAX for Tax Year 2010.
  • 2009: The GST Tax exemption amount was $2,000,000 and the 2009 GST Tax rate was 45%.

The 2016 Tax Year $5,450,000 exemption amount is a "unified" exemption that covers the values of Gifts, Estates, and Generation-Skipping Transfers combined. The exemption is portable for married couples. If one spouse dies before another and their estate does not use the entire $5,430,000 exemption, the other spouse (or their estate) may make use of the remaining amount.

For more details on the Estate Tax, see Publication 559 - Survivors, Executors, and Administrators