Understanding Estate Tax and Gift Tax

When it comes to paying taxes, the government has several areas in which they take a portion of your assets. You pay taxes on what you earn and then you also have to pay taxes when you give money away.

Taxes can be taken out of gifts regardless of whether you give them when you’re alive or after you pass away as part of your estate. Langdon & Company LLP, a Raleigh CPA firm, will review clients documents to determine whether their stated planning objectives have been met. Below are the basics on how the estate tax and the gift tax work together.

Estate Tax

The estate tax is a tax that is charged when an individual passes money onto heirs when they die. The tax is levied on the total value of the estate. Currently, there is a $5 million exemption for the estate tax on the federal level. This means that as long as your estate is less than $5 million in value, there will be no estate tax levied. If your estate is larger than $5 million, then you’ll only be paying tax on the portion that is above that threshold. For example, if your estate is $6 million, then taxes will only be levied on the $1 million.

Gift Tax

In addition to paying an estate tax, you’ll also have to pay taxes on gifts that you give to other individuals while you are still alive. Each year, there is a $14,000 exemption per person. That number doubles to $28,000 per year for married couples. For example, a married couple could give $28,000 per year to multiple people without incurring any kind of gift tax.

Unified Credit

These two taxes are linked together by the unified tax credit. Any money that you give away to an individual over the annual limit either goes toward the unified tax credit or you pay taxes on it. The unified credit is $5 million, the same amount as the estate tax exemption. For every dollar that goes toward the unified credit, that reduces your estate tax exemption by the same amount. This means that if you give too much money away while you’re alive, you will be eliminating the exemption that you could use for your estate taxes when you pass away.

Additionally, there can be state tax implications for estates as well.  The rules vary by state and can impact lifetime giving, estates and beneficiaries’ inheritances depending on the jurisdiction involved.  Also, multiple state taxes may apply if the assets of an estate are located in multiple jurisdictions.

Regardless of which route you decide to take when giving money away, consider the implications of what you’re doing and how it will affect you in the future. With these factors in mind, you may be able to save considerable money in the long run.

Contact Langdon & Company LLP, and a representative will contact you in regards to your questions involving the process of estate and gift transfer plans.