Understanding the Gift Tax

By John Rothe, CMT

John Rothe CMT is the Founder and Chief Investment Officer of Riverbend Investment Management

July 10, 2017

Most of us will never face taxes related to money or assets we give away.


“How can I avoid the federal gift tax?”

If this question is on your mind, you aren’t alone. The good news is that few taxpayers or estates will ever have to pay it.

Misconceptions surround this tax. The I.R.S. sets both a yearly gift tax exclusion amount and a lifetime gift tax exemption amount, and this is where the confusion develops.

Here’s what you need to remember: practically speaking, the federal gift tax is a tax on estates. If it wasn’t in place, the rich could simply give away the bulk of their money or property, while living, to spare their heirs from inheritance taxes.

Now that you know the reason the federal government established the gift tax, you can see that the lifetime gift tax exclusion matters more than the annual one.


“What percentage of my gifts will be taxed this year?”

Many people wrongly assume that if they give a gift exceeding the annual gift tax exclusion, their tax bill will go up next year. Unless the gift is huge, that won’t likely occur.

The I.R.S. has set the annual gift tax exclusion at $14,000 this year. What this means is that you can gift up to $14,000 each to as many individuals as you like in 2017 without having to pay any gift taxes. A married couple may gift up to $28,000 each to an unlimited number of individuals tax free this year – this is known as a “split gift.” Gifts may be made in cash, stock, collectibles, real estate – just about any form of property with value so long as you cede ownership and control of it.1

So, how are amounts over the $14,000 annual exclusion handled? The excess amounts count against the $5.49 million lifetime gift tax exemption (which is periodically adjusted upward in response to inflation). While you will need to file a gift tax return if you make a gift larger than $14,000 in 2017, you owe no gift tax until your total gifts exceed the lifetime exemption.1


“What happens if I go over the lifetime exemption?”

If that occurs, then you will pay a 40% gift tax on gifts above the $5.49 million lifetime exemption amount. One exception, though: all gifts that you make to your spouse are tax free, provided he or she is a U.S. citizen. This is known as the marital deduction.2,3


“But aren’t the gift tax and estate tax exemptions linked?”

They are. The lifetime gift tax exemption, estate tax exemption, and generation-skipping tax (GST) exemption are conjoined. Sometimes they are simply called the unified credit. If you have already made taxable lifetime gifts that have used up $4 million of the current $5.49 million unified credit, then only $1.49 million of your estate will be exempt from inheritance taxes if you die in 2017.2

That unified credit is portable, however. That means that if you don’t use all of it up during your lifetime, the unused portion of the credit can pass to your spouse at your death. (One footnote: the lifetime GST exemption regarding asset transfer to recipients two or more generations younger than the donor is not portable.)1,2

In sum, most estates can make larger gifts during the individual’s life without any estate, gift, or income tax consequences. If you have estate planning questions in mind, turn to a legal or financial professional, well versed in these matters, for answers.




1 – natlawreview.com/article/2017-estate-gift-and-gst-tax-update-what-means-your-current-will-revocable-trust-and [12/6/16]
2 – taxpolicycenter.org/briefing-book/how-do-estate-gift-and-generation-skipping-transfer-taxes-work [6/26/17]
3 – investopedia.com/terms/u/unlimited-marital-deduction.asp [6/25/17]
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John Rothe CMT

Riverbend Investment Management is a Registered Investment Advisor (RIA), established in 2006 with the primary goal to provide actively managed investment strategies to both individual and institutional clients.

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