Understanding the Gift and Estate Tax in the United States
Gifting is one of the many ways to express love and affection. In the United States, gifts are generally not taxed as income or deductions, unless they fall under the Unified Gift and Estate Tax scheme.
Introduction to Gift and Estate Tax
Recently, the Gift and Estate Tax has been undergoing a comprehensive review. It is a part of a larger tax system that includes both gifts and inheritances. Introduced in the United States in 1954, the Unified Gift and Estate Tax (UGET) is a tax that applies to both the giver and the recipient in certain situations. This act aims to impose taxes on the transfer of wealth through gifts and inheritances, thus ensuring that the wealthy pay a fair share of taxes.
Overview of the Unified Gift and Estate Tax
The Unified Gift and Estate Tax applies to both the giver and the recipient. The giver is responsible for paying the tax, unless the recipients are designated as qualifying surviving spouse. The tax exemptions vary depending on the year, with limits rising annually due to inflation adjustments. For example, in 2016, the exemption amount was $5.45 million per individual, and for a married couple, it doubled to $10.9 million.
Annual and One-Time Exemptions
There are two types of exemptions within the UGET: one-time exemptions and annual exemptions. The one-time exemption is a larger amount that can be used once, while the annual exemption is a smaller, recurring amount.
The annual exemption allows individuals to gift a set amount annually without incurring taxes. For 2016, this amount was $14,000 per individual. For a married couple, it was doubled to $28,000. This figure is adjusted annually and currently stands at $15,000 per individual for 2018.
Examples of Applying the Tax
Let's consider a few examples to better understand the application of the Gift and Estate Tax.
Example 1: Annual Allowance
A gives her daughter D an annual allowance of $20,000. Due to the annual exemption, D pays no taxes on this money. However, A must report the gift annually and designate a portion toward the lifetime exemption, which is $6,000 per year. After five years, A dies and D inherits her mother's fortune, worth $6 million. The Unified Gift and Estate Tax exemption has been reduced by $30,000. Therefore, the estate must pay inheritance taxes on $580,000 (6 million 30,000 - 5.45 million).
Example 2: Married Couple Gift
A gives D and her new husband S a combined annual allowance of $20,000. Since D and S are married, A can give them as much as $28,000 without incurring taxes. If A dies in the sixth year, the estate will pay taxes only on $550,000 (6 million 30,000 - 5.45 million).
Example 3: One-Time Gift
A gives D and S a one-time gift of $250,000 in the form of a house. This reduces the Unified Gift and Estate Tax exemption by $250,000, leaving only $5.228 million to be credited against the taxable estate. Therefore, taxes would be due on $772,000.
Conclusion
This overview provides a basic understanding of the Gift and Estate Tax in the United States. However, the complexities of this tax system are vast and require detailed legal and tax planning for individuals and estates. For those involved, it is advisable to seek guidance from a professional tax and estate planning lawyer.
For further reading and comprehensive insight, the following resources are recommended:
The Estate Tax and Lifetime Gifting IRS Announces 2016 Estate And Gift Tax Limits: The 10.9 Million Tax BreakRemember, the Unified Gift and Estate Tax only applies to a small percentage of the population, and very few estates actually owe federal inheritance taxes.