You may or may not know that there is a tax on gifts you make to others. But don’t panic.
Over your lifetime you can give away over $11 million (yes, I said million), before you incur this federal tax for 2019 and it’s higher for 2020 after the inflation adjustment.
My first point to remember is that the gift tax and the estate tax work together. Both taxes share the same triggering point*. The gifts that you make over your lifetime count as if they were assets of your estate. Say what?
Picture this: you are wealthy, with over $50 million in your brokerage account right now. But sadly you are in bad health, and you won’t last another week.
If you know that there is a tax*, up to 40%, on your assets at death, wouldn’t you be inclined to give it away or cleverly get it out of your estate?
Some people, like Elvis Presley, do want to pay the tax, but most of us do not. We would try to give the assets away before death in an attempt to avoid the estate tax.
Do you think no one else has noticed that giving away your assets leads to a small estate?
Thus, whether you die holding the assets, or you give it all away, you had $50 million (let’s keep up the fantasy). Since it’s the same $50 million you once had, you either pay a tax when you gifted it away or you pay a tax when your estate is settled*.
Hopefully you see the point of having the estate tax tied to gifts you made. And this is why the two taxes*, estate and gift, are “unified” and share the same triggering point.
You may not know this, but you are supposed to keep a running total of your gifts, so that you know when you have exceed the lifetime exemption threshold*. Keep in mind that you can exclude the annual $15,000, per person annually, from the gifts you made.
My second point to remember is that for most people, their gifts are less than the annual gift exclusion. This means you are not required to track or report the gifts. And over your lifetime you have a very big spread before either tax* affects you. Hint: it’s the new $11.4 million*.
My simple take away is that for 2019, each of you had a lifetime exemption* of $11,400,000. If you have a net worth under these thresholds*, you won’t owe either the federal gift tax or federal estate tax.
* Reference here is to federal tax laws. State laws on taxation of gifts or estates still apply.