The Bottom Line
The Bottom Line is where Klatzkin’s advisors provide analysis and insight into key developments in taxation, accounting, and other issues and how they affect businesses and individual taxpayers.

Gift Tax and Estate Tax – Are They the Same Thing?

By JAMES EMMA

In the United States, transfers of wealth are subject to tax. When transferred during the giver’s lifetime, wealth is subject to gift tax, but when transferred after death, it is subject to estate tax. Although these taxes are separate and distinct, they do share attributes that are worth exploring.

Gift Tax vs. Estate Tax

In practice, very few taxpayers pay gift taxes. Annual gifts of $15,000 or less are automatically tax-free, and gifts exceeding this amount are typically not taxed until taxpayers have depleted their lifetime exemption.  In 2019, each taxpayer’s lifetime exemption is $11.4 million.

Any remaining lifetime exemption will apply against a taxpayer’s estate. Because the gift tax and the estate tax share the same lifetime exemption, it is commonly referred to as the unified credit. This allows each individual to transfer up to $11.4 million tax-free, either during their lifetime or after their death.

Estate Tax in Recent Years

When President Trump began discussing his tax plans, it was rumored that he would seek to repeal the estate tax. The controversial “death tax” had been on the chopping block for years with pundits arguing that it penalized individuals for being financially successful. When Congress passed the Tax Cuts and Jobs Act (TCJA) in December 2017, many were surprised to see they preserved the estate tax. Fortunately for taxpayers, the TCJA lessened the blow when it doubled the lifetime exemption.

This was just one step in a more than 20-year history toward minimizing the impact of the estate tax. Since the late 1990s, the estate tax exemption has grown, and the maximum tax rate has fallen.

Year

Unified Credit Year

Maximum Estate Tax Rate

1999 $650,000 1999 55%
2003 $1,000,000 2003 49%
2009 $3,500,000 2009 45%
2013 $5,250,000 2013 40%
2019 $11,400,000 2019 40%

These trends mean that fewer individuals need to be concerned about the estate tax than ever before – that is, as long as they plan correctly.  It was estimated that beginning in 2019, fewer than 2,000 estates across the country would be liable for estate taxes each year.

Wealth Transfer Planning – The Bare Bones

A proper wealth transfer plan will focus on both lifetime gifts and the taxpayer’s estate. These plans will be unique to each individual. Taxpayers who wish to transfer their wealth should take advantage of the $15,000 annual exclusion. If yearly gifts to individuals are kept below this dollar threshold, taxpayers will owe no gift taxes and can preserve their full lifetime exemption to apply later in life or against their estate.

Another way to avoid taxes on wealth transfers is to make gifts that are not subject to gift tax at all, such as directly paying for a loved one’s tuition or making charitable contributions. To discuss more in-depth gift and estate planning options, contact your CPA for advice.

How to File

Not all taxpayers who make gifts will be required to file gift tax returns. Taxpayers whose gifts stay below the $15,000 annual threshold will not be required to file, but once they exceed that amount, they must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This rule applies even if their lifetime exemption reduces their taxes owed to zero.  Make sure that you keep any filed gift tax returns with your important papers as you will need them to keep track of your remaining lifetime exemption. This will also help your CPA optimize your overall wealth transfer plan.

Gift tax returns are due annually on April 15th of the following year that the gift was made. This due date coincides with personal income tax return due dates and can also be extended if you need a bit more time to file.

Generation-Skipping Transfer Tax

Form 709 also reports the generation-skipping transfer tax (GSTT). Before the GSTT was implemented, wealthy families could lower their overall gift and estate tax bills by transferring wealth to their grandchildren rather than first moving it to their children. The IRS caught onto this scheme and closed the loophole by applying the GSTT on gifts to individuals who are at least 37.5 years younger than the giver. GSTT shares the same lifetime exemption as the gift and estate taxes, and just like regular gift tax rules, annual transfers of $15,000 will be tax-free.

If you have any questions about how your lifetime gifts will affect your wealth transfers at death, Klatzkin can help. For additional information, please call us at 609-890-9189 or click here to contact us.

James Emma is a Supervisor at Klatzkin and a member of the Estate Administration team.

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