| Gift and Estate Taxes
If you give away money or property during your life, those
transfers may be subject to federal gift and estate tax and perhaps state gift
tax. The money and property you own when you die (i.e., your estate) may also
be subject to federal gift and estate tax and some form of state death tax.
These property transfers may also be subject to generation-skipping transfer
taxes. You should understand all of these taxes, especially since the passage
of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax
Act), the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation
Act of 2010 (the 2010 Tax Act), the American Taxpayer Relief Act of 2012 (the
2012 Tax Act), and the Tax Cuts and Jobs Act. The recent Tax Acts contain
several changes that make estate planning much easier.
Federal gift and estate tax — background
Under pre-2001 Tax Act law, no federal gift and estate tax
was imposed on the first $675,000 of combined transfers (those made during life
and those made at death). The tax rate tables were unified into one — that is,
the same rates applied to gifts made and property owned by persons who died in
2001. Like income tax rates, gift and estate tax rates were graduated. Under
this unified system, the recipient of a lifetime gift received a carryover
basis in the property received, while the recipient of a bequest, or gift made
at death, got a step-up in basis (usually fair market value on the date of
death of the person who made the bequest or gift).
The 2001 Tax Act, the 2010 Tax Act, the 2012 Tax Act, and
the Tax Cuts and Jobs Act substantially changed this tax regime.
Federal gift and estate tax — current
The 2001 Tax Act increased the applicable exclusion amount
for gift tax purposes to $1 million through 2010. The applicable exclusion
amount for estate tax purposes gradually increased over the years until it
reached $3.5 million in 2009. The 2010 Tax Act repealed the estate tax for 2010
(and taxpayers received a carryover income tax basis in the property
transferred at death), or taxpayers could elect to pay the estate tax (and get
the step-up in basis). The 2010 Tax Act also re-unified the gift and estate tax
and increased the applicable exclusion amount to $5,120,000 in 2012. The top
gift and estate tax rate was 35 percent in 2012. The 2012 Tax Act increased the
applicable exclusion amount to $5,490,000 (in 2017) and the top gift and estate
tax rate to 40 percent (in 2013 and later years). The Tax Cuts and Jobs Act,
signed into law in December 2017, doubled the gift and estate tax exclusion
amount and the GST tax exemption (see below) to $11,180,000 in 2018. The amount
is $13,610,000 in 2024 ($12,920,000 in 2023). After 2025, they are scheduled to
revert to their pre-2018 levels and cut by about one-half.
However, many transfers can still be made tax free,
including:
- Gifts to your U.S. citizen spouse; you may give up to
$185,000 in 2024 ($175,000 in 2023) tax free to your noncitizen spouse
- Gifts to qualified charities
- Gifts totaling up to $18,000 (in 2024, $17,000 in 2023) to any one
person or entity during the tax year, or $36,000 (in 2024, $34,000 in 2023) if the gift
is made by both you and your spouse (and you are both U.S. citizens)
- Amounts paid on behalf of any individual as tuition to an
educational organization or to any person who provides medical care for an
individual
Federal generation-skipping transfer tax
The federal generation-skipping transfer (GST) tax imposes
tax on transfers of property you make, either during life or at death, to
someone who is two or more generations below you, such as a grandchild. The GST
tax is imposed in addition to, not instead of, federal gift and estate tax. You
need to be aware of the GST tax if you make cumulative generation-skipping
transfers in excess of the GST tax exemption ($13,610,000 in 2024, $12,920,000
in 2023). A flat tax equal to the highest estate tax bracket in effect in the
year you make the transfer (40 percent in 2023 and 2024) is imposed on every
transfer you make after your exemption has been exhausted.
State transfer taxes
Currently, a few states impose a gift tax, and a few states
impose a generation-skipping transfer tax. Some states also impose a death tax,
which could be in the form of estate tax, inheritance tax, or credit estate tax
(also known as a sponge or pickup tax). Contact an attorney or your state's
department of revenue or taxation to find out more information
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