What Is The Gift Tax?

gift tax; gift tax exclusion; The Law Offices Of Lawrence Israeloff, PLLC Melville, NY 11747The gift tax is also a component of the federal transfer tax system and is a tax imposed on transfers (i.e., gifts) of property during life, either given outright or to a trust. Like the estate tax, the gift tax is a transfer tax distinct from the familiar income tax.

Generally, the gift tax is determined by applying the transfer tax rate (the same rate that applies to the estate tax) to the value of property above the exemption amount (the same exemption amount that applies to the estate tax) that is gifted by one person to another during their lifetime, but not including property transferred to a spouse.

Thus, the gift tax covers transfers of property during life, while the estate tax covers transfers of property at death.  The two taxes work together, and are said to be unified.

So from a transfer tax perspective, is it better to give away property as a gift during life (subject to the gift tax), or to leave assets to heirs in a will at death (subject to the estate tax)? Generally, if you give assets away while you are still alive, you are also ridding your estate of the future appreciation in the value of that asset. The assets you give away now will trigger a lower gift tax (if any) today than an estate tax years from now because of the assets’ appreciated value at death.

Gift Tax Annual Exclusion

Each year, a person can gift to any one or more other persons up to the annual exclusion amount (currently $14,000 per recipient in 2015) without triggering the gift tax. Married couples can combine their individual annual exclusion amounts and gift $28,000 each year to each person without triggering the gift tax.

Annual exclusion is meant to shield from tax the small common gifts made every year to friends and relatives, such as birthday presents, holiday gifts and small tokens of appreciation.

The Gift Tax is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.

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What Is The Estate Tax?

The estate tax is one component of the federal transfer tax system, which also includes the gift tax and the generation-skipping transfer tax. The estate tax is a tax imposed on the transfer of property at death. It is a transfer tax, which is a different tax than the familiar income tax.

Generally, the estate tax is determined by applying the transfer tax rate to the value of property on the date of death owned by the decedent in excess of a threshold amount (currently $5.43 million per person in 2015). The tax is technically imposed on the transfer of the decedent’s property either outright or in trust to the decedent’s heirs, but not including property  transferred to the surviving spouse.

Most people will not be subject to the estate tax because most people will never own property with a total value in excess of the threshold amount. The threshold amount is referred to as the exemption amount, and is $5.43 million if you die in 2015. The exemption amount increases every year at the rate of inflation.

Estate Tax is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.

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