Cape Cod Lawyers Advising on Estate & Gift Tax Return Services
In simple terms, the gift tax is associated with property or money you give away from your estate to any individual while you are still living. According to the IRS, in 2020, the lifetime gift tax exemption is $11.58 million per individual, with annual gift limits of up to $15,000.00 per person, per year.
Gift taxes can be directly associated with estate taxes. Estate tax is the tax enforced by the government on any transfer of tangible or intangible property after you have passed away. Any gifts that exceed the annual gift tax exclusion limit of $15,000.00 will count towards your lifetime exclusion and the gift may count towards your estate, reducing the exemption amount of the estate when you pass away.
How Does The Lifetime Gift Tax Exclusion Work?
Besides an annual $15,000.00 every year, you get an 11.58 million lifetime exclusion per person. This means that married couples can double that number in lifetime gifts. You may transfer up to a total 11.58 million while you are living or upon your death without having to pay taxes.
Any annual gifts exceeding $15,000 will not necessarily mean you need to pay gift taxes, but the amount that exceeds the annual limit will be applied to your 11.58 million lifetime exclusion and will be subtracted from that number. It also means you will likely need to file a Gift Tax Return, even if you do not owe any taxes.
The gift tax return basically keeps track of how much you have subtracted from your lifetime exemption. So, hypothetically, if you don’t make any gifts during your lifetime, you will still have the full amount of 11.58 million to use against your estate when you die.
You only need to actually pay the gift tax if you make enough gifts to exceed your lifetime exemption. As the giver, you will generally be responsible for paying anywhere from 18% to 40% in gift taxes. This varies depending on your state and on current IRS rules.
What Are The Pros and Cons of Gifting Now vs. Later?
Besides being able to take advantage of tax savings by using your annual and lifetime exclusion, by giving your heirs gifts now, you may be able to have better control over how they spend it, and you get to see them enjoy it and see the difference it makes in their lives. You may also avoid taxes by directly paying for something (a wedding, college tuition, etc.) instead of giving them the money. And by paying your heirs while you are still living, you have the ability to determine if they are spending it wisely or not, and stop paying them if they are using the money unwisely or in a frivolous manner.
Conversely, you might choose to wait until you pass away to give out your money since you may need it for retirement or for expenses related to long-term or end-of-life care. It also gives you the opportunity to change your mind and alter the amount you want to leave your heirs after you pass away. It may also mean they will appreciate your money more because they had to earn it, and have better chances of making it in the world at an earlier age.
How Can I Get Help to Prepare and File a Gift/Estate Tax Return?
Regarding estate tax returns, we recommend that a federal return be filed even if it is not required, because it may be critical for many families whose estate is below the exemption amount. This allows the personal representative or executor to elect portability and enable a surviving spouse to receive the unused tax exemption of the first spouse to die.
When you choose The Law Offices of Boyd & Boyd for your Estate and Trust Administration, your Estate tax return will be prepared by our estate planning attorney. We can also assist you in preparing a gift tax return when your gifts of cash or property exceed your annual exclusion limit of $15,000.00 dollars.
Call us at (508) 775-7800 and request a free initial estate planning consultation to learn more.