There is a gift tax at the federal level. Yes, this means that gifts you give to others are potentially taxable. However, most people never pay the tax because of the existence of the annual gift tax exclusion.
What Is It?
The annual gift tax exclusion allows you to give as much as $14,000 to any number of people each calendar year free of the gift tax. Generally, if you never make a gift to anyone within a calendar year that exceeds the amount of the annual per person gift tax exclusion, the gift tax will never be a factor for you.
Unified Gift and Estate Tax
To understand the gift tax, you have to understand how the unification of the estate and gift tax works. The amount of the unified gift/estate tax exclusion is $5.34 million. If there was no gift tax, people could simply give away assets during their lifetime to avoid the estate tax. Therefore, the gift tax was put in place to close this loophole.
By unifying the gift tax and the estate tax, if you use your $5.3 million unified exclusion while you are living, there would be no exclusion left to apply to your estate tax. As a result, if your estate exceeds this amount, estate tax would apply
Intersection of Exclusions
The unified lifetime exclusion exists completely separate from the annual gift tax exclusion. There are two different exclusions.
Let’s explain the intersection of these two separate exclusions. Suppose you give your son $14,000 on July 4th.
This gift can be given tax-free using the annual gift tax exclusion. The amount of your available lifetime unified $5.34 million gift and estate tax exclusion would not be reduced by $14,000.
If you subsequently wanted to give your son $2.34 million as a gift later in the year, you could give the gift on a tax-free basis by utilizing a portion of your unified lifetime exclusion. If you used $2.34 million of your exclusion, you would have a $3 million exemption left to utilize in the future.
Unlimited Marital Deduction
If you are a high net worth individual who is exposed to estate and gift taxes, you should understand that you don’t have to use any type of exclusion to transfer assets to your spouse.
If you are married to an American citizen, you can make unlimited gifts to your spouse free from the gift tax. At your death, you can also leave unlimited assets to your spouse free of the estate tax.
However, you would still want to discuss tax efficiency strategies with a licensed estate planning attorney even if you want to leave everything to your spouse. This is because he or she would then be in possession of assets that would eventually be subject to the estate tax.