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The gift tax is a fee imposed on the transfer of anything of value given by one living person to another. The individual who gives the gift has the responsibility of paying the taxes associated with it. Gift taxes are an important consideration in estate planning because they can ultimately impact the amount of taxes owed after an individual passes away.

About Gift Taxes

Gift taxes are an attempt to prevent a person from giving away their assets before their death to avoid estate taxes.

The job of the Internal Revenue Service (the IRS) is to collect what Congress says is owed, whether that it is through the gift tax during a person's life or the estate tax at their death.

These rules should not be confused with the rules of other systems, such as those governing the transfer of assets for Medicaid and nursing home eligibility.

Exemptions & Limits

The Internal Revenue Code (where the federal tax statutes are kept) has exemptions in place to help taxpayers reduce their estate and gift-tax burden. 

The Annual Gift Tax Exclusion is the tax-free amount you generally can give another person in a single year. This amount can change from year to year based on inflation; the 2020 limit is $15,000 (gifts between spouses are different). Bear in mind that it’s $15,000 per gift recipient, so you can give multiple gifts to multiple people as long as the total of any one of those gifts does not exceed $15,000. If you’re married, you can each give a $15,000 gift to a recipient (that’s $30,000 per recipient, per year, for those keeping track). The catch with this exemption is that the gift must be owned and usable by the beneficiary immediately. Thus, a Christmas check meets the test, but a gift that fully transfers after a triggering event (like someone’s death) does not. If you give more than the Annual Gift Tax Exclusion to a recipient in a year, the excess uses some of the Lifetime Exemption.

estate planningThe Lifetime Estate and Gift Tax Exemption is a cumulative limit on how much you can give tax-free throughout your lifetime. Any amount that you have not used will be applied against your estate at your death.

The Lifetime Exemption is set by Congress, and currently also changes based on inflation from one year to the next; the 2020 cap is $11.58 million per person. A few states also have a gift tax payable to the state government, but most do not. Tennessee repealed theirs in 2012.

Gift Taxes & Estate Planning

When estate planning, most people want to reduce the financial burden on their loved ones later on, so they will take advantage of the exemptions when mapping out their estate plans. One of the most overlooked rules in general discussions of the estate and gift taxes is the treatment of gifted assets when the recipient chooses to sell them later on. When a person sells an asset, that person is subject to the capital gains tax on the difference between what the person paid to get it (your “basis”) and what the person sold it for. For example, if you buy a stock for $100X and sell it for $125X, you are taxed on the gain of $25X. If you got an asset as a gift from someone then sell it, how much should you be taxed on? If you got the asset as a gift, your basis is what the donor paid to get that property. If you inherited it, your basis is the price as of the date that person died. 

Given the high estate and gift tax exemptions we currently have, most people are more concerned about capital gains taxes and the costs of long term care than they are about the costs of the estate and gift tax. With careful planning through a knowledgable estate planning attorney, you can use those exemptions to your advantage and accomplish your goals while minimizing or eliminating all of those taxes. 

 

An estate planning professional will guide you through the process and help you make the best decisions for reducing taxes. Trailhead Estate Planning serves clients throughout the Signal Mountain and Chattanooga, TN, areas. Their attorneys offer estate planning services that help you prepare your future and legacy. Call (423) 228-7029 or visit them online to schedule a consultation.

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