The federal estate and gift taxes are companion taxes the federal government uses to tax the transfer of wealth from one person to another. The estate tax is a tax on property passed to your beneficiaries at your death while the gift tax is a tax on property you gift, or give away, while you are still alive. These two taxes work together to make sure money is not transferred from one person to another without tax consequences.
How the Gift Tax Works?
The gift tax starts with the basic idea that you should pay a tax to the government every time you give someone a gift. In actuality this almost never happens because of the yearly exemption. The government allows you to give $14,000 each year to anyone. What this means is you could give $14,000 to 100 different people and not have to pay any gift tax. There are also other exemptions such as directly paying for someone else’s medical care or education. Any gift beyond these exemptions must be reported to the government by filing a Form 709. You will be able to apply your lifetime estate and gift tax unified credit.
How the Estate Tax Works?
The estate tax is the tax your estate pays when you pass property at your death. Various provisions of the tax code define what property you own at your death is or is not included in what is referred to as your “gross estate.” Your gross estate is the amount used to calculate your estate tax owed. Your personal representative will file a Form 706 as part of the administration of your estate to pay any estate tax owed.
The Unified Credit
The estate and gift taxes have one unified tax credit that you can apply to all transfers you make in the form of gifts or inheritance. Currently, the IRS allows to transfer $5,450,000 without paying any tax. Any transfer above $5,450,000 are taxed at a rate of 40%.
The major difference between the gift tax and the estate tax is the way the tax is paid. When you file a gift tax return (Form 709), you as the filer will pay any tax owed. To illustrate, you give someone $100 and then you pay $40 in tax. The estate tax works the other way. Because you have passed away, any taxes you owe are taken out of your estate. For comparison, you die leaving $100 and then your estate pays $40 in taxes; now your estate is only worth $60.
Why is This Important?
There are nuances in the Internal Revenue Code that may create advantages to transferring your money in different ways. For example, it may make sense to give $100 to your children now rather than holding on it the money until you die because if the money collects interest and is $200 at your death, you will have to pay more taxes. Alternatively, let’s imagine you own $100 in stock. Overnight the stock market booms and your stock is now worth $1,000. If you give your stock to your children before you pass away, when your children sell this stock there basis is $100, meaning that they will have to pay a capital gains tax on $900 if they sell the stock for the $1000 it is now worth. However, if you pass this stock to your children when you die, your children will receive a step-up in basis so their basis will be the value of the stock when they receive ($1,000).
It is also important to remember that when you add someone’s name to a property title, you are making a gift to them if they did not give you money for the item. For example, you purchase a new car, and you decide to put your child’s name on the title so they could have the car if anything happens to you. You just gave a gift of half the value of that car to your child. This may cause you to have to file a gift tax return.
For more information on Federal Estate & Gift Taxes In Florida, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling 727-827-7777 today.