The gift tax is a tax imposed on the transfer of ownership of items or property. The IRS defines, a gift as “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”
A taxable gift can be cash, stocks, real estate, or other property. When a gift is given the tax is usually assigned to the giver. A gift can be completely gratuitous, when the donor receives nothing of value in exchange or gratuitous in part, when the donor receives something of value but its value is substantially less than the value of the item given by the giver. In this case, the amount of the gift is the difference in value.
If you’re fortunate enough to give away substantial amounts of money or property during your lifetime, your generosity may be subject to federal gift tax rules. After death, your money and property, known as your estate, may also be subject to federal estate tax. With planning you can give assets or cash away during your lifetime to your heirs that are exempt from taxation. In 1976, Congress created a unified tax system for the federal gift tax and estate tax that limits the giver’s ability to circumvent the estate tax by giving all assets during his or her lifetime.
In estate planning, you must consider the unified credit. If you exceed the annual gift tax exclusion amount ($14,000) in any year, you can either pay the tax on the excess or take advantage of the unified credit to avoid paying the tax. The unified credit enables you to give away $5 million (plus the annual inflation adjustments) during your lifetime without having to pay gift tax. By using the unified credit during your life, you’ll reduce the amount available to offset the estate tax upon your death. If, you instead opt to pay the gift tax, these taxed gifts do not reduce your lifetime $5 million unified credit.
Gift Tax Exclusions
You can give a $14,000 monetary gift (in 2014) to as many individuals as you want in any given year, without triggering the gift tax. In addition to the annual exclusion amounts, you also can give: gifts to charity, gifts to a spouse or domestic partner, gifts to a political organization, gifts of educational expenses in the form of tuition payments to a recognized educational institution, and gifts of medical expenses without triggering the gift tax.
The American Taxpayer Relief Act OF 2012 increased the tax rate on estates in excess of the exemption amount of $5 million from 35 percent to 40 percent.
The new estate tax law, does allow transfer of unused estate and gift tax exemptions between spouses. There are differences between estate and gift taxes that must be considered when planning distribution of wealth and assets to your heirs. Things to consider include; the effective tax rate, the amount of the credit available against tax, and the basis of the received property.