Understanding Estate and Gift Taxes

Foodman CPAs & Advisors
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Although only .2% of US Taxpayers actually pay Estate Taxes (Congress's Joint Committee on Taxation), it is important to understand how Estate Tax works in conjunction with gifting.  Taxpayers work hard to create wealth. Its transfer is an important concept.

What is the Federal Estate Tax?

It is a tax on a Taxpayer’s transfer of property at death. It consists of inventorying everything that the Taxpayer owns or has a certain interest in at the date of death at fair market value.  The total of all of the property items is known as the "Gross Estate “and can include cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. After a “Gross Estate” is determined, certain deductions are allowed in order to determine the “Taxable Estate”.   These deductions may include:

  • Marital Deduction:  All property that is included in a Gross Estate and passes to the surviving spouse is eligible for the marital deduction. The property must be passed "outright." C
  • Charitable Deduction: If the decedent Taxpayer leaves property to a qualifying charity, it is deductible from the Gross Estate.
  • Mortgages and Debt.
  • Administration expenses of the estate.
  • Losses during estate administration.

Filing an Estate Tax Return

A filing is required for estates with combined gross assets and prior taxable gifts exceeding the filing threshold for 2018 of $11,180,000 (up from $5,490,000 in 2017).   There are simple estates comprised of cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property that do not require the filing of an estate tax return.

An Estate Tax Return may need to be filed for a decedent who was a nonresident and not a U.S. citizen if the decedent had U.S.-situated assets.  

What is the Gift Tax?

The gift tax is tax on the transfer of property by one individual taxpayer to another while receiving nothing, or less than full value, in return. The tax applies whether or not the person making the transfer of property (the donor) intends the transfer to be a gift.  Gift tax applies to the transfer by gift of any property. Individual taxpayers make a gift if they give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If an individual taxpayer sells something at less than its full value or if they make an interest-free or reduced-interest loan, they could also be making a gift.  The donor is generally responsible for paying the gift tax.

Any gift is a taxable gift except for:

  • Gifts that are not more than the annual exclusion for the calendar year ($15,000 for 2018).  The annual exclusion applies to gifts to each donee.
  • Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  • Gifts to a U.S. Taxpayer spouse.
  • Gifts to a political organization for its use.
  • Gifts to qualifying charities.  

What if a Taxpayer receives a gift and then wants to sell it?

The basis in the property of the donee is the same as the basis of the donor. Meaning, if a donee receives a property that the donor purchased for $100,000 (and that was his/her basis), and the donee later sold it for $190,000, the donee would pay income tax on a gain of $90,000.  

Who can assist a Taxpayer that is a recipient of an Estate and or a Gift?

Taxpayers often engage the services of an attorney or a CPA if an estate and or gift or transfer is complex.  Moreover, the condition of the decedent's records as well as the number of beneficiaries and their cooperation might increase the level of difficulty of an estate and financial plan.  

Don’t be a victim of your own making

The legal, tax and accounting requirements of Estates and Gifts can be a daunting task.  Taxpayers are encouraged to consult a specialized tax representative in order to ensure that all records are in compliance with tax and accounting rules.       

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