• bryan@heritageincometax.c

Estate and Gift Tax for Beginners

Estate and Gift Tax for Beginners[1]


Most of us are familiar with paying income or property tax; but have you heard of the gift tax? In most instances, the government does not tax a gift from one person to another. However, in some circumstances, particularly for wealthy individuals, a tax on gifts can be costly.


Federal gift tax is levied on the donor. Due to a large exclusion, federal gift tax only impacts an extremely small percentage of the population. For the most part, only wealthy individuals are subject to the tax. However, for those affected, the gift tax can be extremely expensive. The 2019 tax rates range from 18% to 40% depending on the size of the gift.[2] The good news is that innovative tax strategies and planning can significantly reduce a taxpayer’s estate and gift tax liability.


There are three exceptions to the federal gift tax. First, certain types of gifts are not considered taxable, regardless of amount. For example, gifts between spouses are exempt from the tax, and enjoy an unlimited exclusion. Similarly, gifts made for education purposes, charitable, and medical purposes are not subject to federal estate or gift tax.


A second exception, the “annual” exclusion applies to gifts of less than $15,000 per year, per beneficiary.[3] For example, a grandparent can give a gift of $15,000 to seven different grandchildren without incurring any gift tax liability.


Finally, for gifts that fall outside of any exempted category or annual exclusion, the law provides a third “lifetime” exemption for gifts under $11.4 million dollars ($22.8 million for married couples). That $11.4 lifetime exemption applies to gifts that occur both during and after the donor’s lifetime. Since the annual exemption applies to lifetime gifts as well as gifts passed through one’s estate, it is often referred to as the “unified credit” for gift and estate taxes.[4]


Here’s a few examples of how the estate and gift tax works:


1. Tom gives $20,000 to his two daughters during the same year. Tom’s gift exceeds the annual exclusion by $5,000 for each gift, for a total of $10,000. That $10,000 would be applied against his lifetime exemption, reducing his lifetime exemption to $10.39 million for future gifts.


2. Assume the same facts as above, except Tom dies with $20.4 million dollars in his estate. The $20.4 would be reduced by his remaining lifetime exemption ($10.39 million). Tom’s estate would be taxed on $10.01 million at the rate of 18%.

For those who are curious, Ohio does not have an estate or gift tax. Kentucky, on the other hand, is one of six states with an inheritance tax. As the name suggests, an inheritance tax is levied on beneficiaries of large estates, rather than wealthy donors.


Estate and gift tax forms can be difficult to understand and require significant research to complete. If you need assistance with your taxes, find a qualified professional who can navigate these complicated issues. The experts at Heritage Income Tax can help you mitigate the effects of estate and gift tax, allowing you to enjoy considerable tax savings now and in the future.


[1] The author, Bryan Corcoran, Esq, is a retired Marine Judge Advocate. He earned his J.D. and Masters in Taxation from the University of Akron in 1997. He is currently a Tax Analysts for Heritage Income Tax. The views expressed in this paper are his own, and are not intended as a substitute for professional tax planning or legal advice. [2] 26 U.S.C. Sec 2001(c) [3] 26 USC Sec 2503 [4] 26 U.S.C. Sec 2010

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