Understanding the Federal Gift Tax and its Implications
Compliments of Our Law Firm,
Ambler | Keenan | Mitchell | Johnson
Written By: The American Academy of Estate Planning Attorneys
The reality is that few Americans will ever have to worry about the federal gift tax. The reason is simple: Federal gift taxes are calculated only on very large gifts you make. The exemption for 2020 is $11,580,000. In 2026, the exemption is $5,000,000, adjusted for inflation. This means until your collective gifts reach these dollar amounts, you don’t have to worry about the federal gift tax.
Still, it’s always a good idea to understand the dynamics and be prepared, even if the federal gift tax doesn’t seem relevant today. Understanding what federal gift taxes are – and what they’re not – is always good information to know.
For the sake of the tax, a gift is defined as any transfer for which the giver receives nothing in return, or a transfer at less than fair market value. Fair market value is simply the price at which an asset would sell when there is both a willing and knowledgeable buyer and seller. The person who makes the taxable gift is responsible for filing the gift tax return and paying any taxes that are owed. For example, if you sell your car to your best friend for $10 and its fair market value is $5,000, you are responsible for the taxes on the $4,990 gift.
So now that we know what constitutes a taxable gift, what type of gifts aren’t included?
- Any gifts less than the annual exclusion amount (currently at $15,000 per person to any individual in 2020)
- Tuition paid directly to the educational institution. Note: this does not include books, supplies, apartments or other living expenses
- Medical expenses paid directly to a doctor, hospital, or other medical entity
- Gifts to your spouse (if your spouse is a U.S. citizen)
- Political donations
- Charitable donations
Remember: federal estate taxes are calculated at the time of death considering any taxable lifetime gifts. Even then, federal estate taxes are calculated only on the amount exceeding the exempt amount. Worth noting is that the current gift tax rate is 40 percent.
Whether it’s giving to a worthy cause, helping a loved one in their time of need or ensuring our estate plans serve the role of providing for others after we’re gone. Gifting is an important element of life to many of us. An experienced estate planning attorney can help you meet those goals and also ensure there are no vulnerabilities in your plans. While the federal estate tax can be a bit confusing, don’t allow it to sway you from gifting to the causes that are important to you.