I’m confused on a point about estate and gift taxes, and the IRS site is not really helping me.
What I understand is there’s a $14,000 annual limit on how much a single donor can give a single donee without owing gift taxes, which are a hefty 40% for amounts over that limit. Estate taxes are 50% (I believe) on any value of the estate in excess $5.3 million. However, that $5.3 million is reduced by any taxable gifts given since 1977. It’s also made reasonably clear that taxable gifts are those in excess of the annual limit.
So, let’s say I give my son $24,000 this year (ignoring for the moment that I have neither $24,000 to spare nor a son). Do I owe $4,000 in gift taxes to the IRS in April, or does the IRS wait until I die, and then subtract the $10,000 from my lifetime exemption, and claim payment then if necessary? Another possibility is I owe gift tax now, but my heirs might be able to get it back when I die. I guess to be complete, it’s also possible that I owe $4,000 now and my lifetime exemption is reduced. That doesn’t seem right though.
Gift or estate taxes are not owed until you exceed the 5.3 million total in your lifetime for both gifts and taxable estates combined.
The 14,000 amount is the threshhold where filing an annual gift tax return is required. However, no tax will be owed on the amounts gifted over 14,000, the excess would simply reduce your lifetime gift/estate tax exclusion amount from the 5.3 million by the excess. So if you have never given any gifts in prior years that were above the yearly filing threshold amount, you could gift someone 5 million bucks tomorrow and not owe any taxes, it would just make it extremely likely that you could have a taxable estate when you died because you would have used the majority of your gift/estate lifetime exclusion.
Thanks Nothar! So, I would have to file something reporting my $10,000 taxable gift, but it wouldn’t cost me anything. It might cost my heirs later, but actually that wouldn’t be likely either. How many people have over $5million to give away, even including the final value of their estates? Well, one percent I guess.
The lifetime exemption changes from time to time. It seems locked in for awhile now, but if it suddenly reverted to $2 million, what would happen to people who’d already gifted $5 million? It seems likes there would be a flurry of money transfers from patrician to scion on Dec. 31 before the year limit was reduced.
No if the gift is less than $14,000 (the current limit) it need not be reported and it does not count against your lifetime exclusion. That is the limit per gift so you could give $14,000 to two different people and still be OK.
Actually something like 40% of estates in the US are over $5 million. Remember that the value of the estate includes property like houses and not just liquid wealth. It can also include life insurance proceeds if they are paid to the estate. This would happen for example if the designated beneficiary predeceased the insured.
The average median household wealth of the best-off tenth of all households in the UK is now £1.4 million. The poorest tenth have less than £5000. Those in the middle have between £200,000 and £500,000. Most of this will be real estate.
Totally false. Maybe you mean that 40% of all estates that have enough assets that they think it’s a good idea to file a Form 706 (Estate and Gift Tax Return) are over $5M.
No, all life insurance proceeds are included in the estate for estate tax purposes, whether or not the proceeds are paid to the estate.
You may be thinking of probate. Life insurance proceeds are only in the probate estate if they’re paid to the estate rather than to a named beneficiary.
Either way, most Americans don’t have a million-dollar life insurance policy. Most Americans have a negligible amount of worth in stocks and bonds. And so forth.
Sorry, yes. Looking back at the cite that’s what it was.
I thought this depended on who the owner of the policy was. The owner can differ from the insured, and if the owner is not the insured and the benefits are not paid to the estate, then they are not part of the estate.
Actually, I was implying my original example where I was giving my hypothetical son my hypothetical $24,000. I was asking if I would then (hypothetically) need to file a form showing the extra $10,000 as a taxable gift, but not actually have to pay tax on it since it’s way below the $5.3 million dollar lifetime limit. Based on Nothar’s information, that seems to be the case. I still have a niggling feeling that I’m missing a piece of the story though.
No, Nothar covered the basics. For most people, the gift/estate tax exclusion means they’ll never have to pay tax, but they do have to report it.
There are some finer points to the law. For example, the $14k is per person per year, so if you are married, or your son is, you could give $14k to/from each spouse ($28k if one of you is married, $56k if both) before you hit the taxable limit. Or you could give half the gift on Dec 31st and the rest on Jan 1st. If you’re giving assets like cars, houses or stock, then you have to pay a little more attention to the valuation of the asset (both for your gift purposes and for the son’s eventual taxation when he sells it).
With respect to all in this thread, can I suggest that it might be worth it to consult an accountant? He or she may well have information about these matters which isn’t being touched on here. If you’re looking into how to handle taxes for large amounts of money, it’ll be worth a small fee to get an answer. They may even do a free consult in hopes of getting more business from you.