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Estate and Gift Tax

Estate and Gift Tax

The I.R.S requires that you report all taxable donations you make during the year and pay the appropriate tax. However, the average taxpayer never files a gift tax return or pays gift tax due to the available generous exclusions and deductions. The federal government intends to impose a tax only on the wealthy who dispose of their assets through high-value donations.

Some of the most complex laws by the IRS are gifts and property tax. But do not worry; Due to donations and inheritance tax exclusions, these taxes currently affect only the richest 2% of Americans. If you are required to pay gift tax when preparing and filing your tax return, a tax professional should be able to help you determine this based on his/her level of expertise.


Gift tax

When you donate money or property to someone, you might end up owing a gift tax. A taxable donation is considered a transfer of money or property to another person without full compensation or reimbursement of at least the same amount. Loans with low interest or no interest can be considered as gifts for tax purposes.

Here are four factors you need to know if you are gifting someone money or goods:

  • If you donate the property, taxes must be paid on the item's fair market value (not on the purchase price or original value).

  • If you give someone one or more gifts in cash or property and the value is greater than the annual donation exclusion amount, you will generally be required to pay gift tax.

  • You are not required to pay taxes on gifts that qualify for other exclusions.

  • You do not have to pay taxes for gifts whose total value is less (or equal) to the annual exclusion amount ($ 15,000 per beneficiary in 2020 and 2021).


Gift Tax Exclusions

There are several ways to reduce the amount of gift tax you may owe:

  • Charitable Donations: Charitable donations made to charities are not the only deductible on itemized income tax returns (for your 2020 return, you can deduct $ 300, and it not a must to itemize); you can also deduct the amount of your donation from the amount of donation tax owed.

  • Gifts to your spouse: You do not have to pay tax on any amount given to your spouse as a gift unless your spouse is not a US citizen.

  • Medical and Educational Expenses: You don't have to pay taxes for any amount paid for another person's tuition fees or medical bills. Payment should be made directly to the educational or medical institution and not to the person receiving the education or care.

  • Political contributions: Political donations are considered gifts, non-deductible charitable contributions, and you may exclude any amount donated to political organizations. The organization must use the money for its purposes and not act as an intermediary to distribute funds to third parties.


Annual gift exclusion

In 2020, you can gift someone up to $ 15,000 in gifts before paying any tax on donations. The $15,000 annual gift exclusion is a limit on non-taxable gift per person, and you can donate more than $ 15,000 each without incurring any tax liability; however, the annual donation exclusion amounts are limited to a lifetime total of $ 11,580,000 for fiscal 2020 ($11,700,000 for fiscal 2021). For donations made to non-US spouses, the annual exclusion is $ 157,000.


Gifts Splitting 

Couples can split the value of gifts given together as a couple, thus doubling the annual exclusion of gifts for joint filers. Couples can exclude a donation of up to $30,000 per person per year. If a community-owned donation is made, each spouse is considered to be giving half of the donation's fair market value.

For 2020, the exclusion of the individual donation of $15,000 was portable for couples. This means that if one of the spouses does not exceed the limit of $ 15,000, the other spouse can use it. 

 

Estate tax

When a person inherits money or property, the transfer may be subject to inheritance tax. Inheritance tax is commonly referred to as death tax because it is the tax paid for transferring money and property after a person's death. If your estate's value is greater than the current exemption amount on your death, your estate must pay tax on the amount that exceeds the applicable tax rate.

The exemption amount of $11,580,000 for fiscal 2020 is a one-time exemption that applies to the combined amounts of gifts, inheritances, and generational transfers that are ignored. This unified exemption is transferable for couples, so if one of the spouses dies before the other and their assets do not meet the limit of $11,580,000, the other spouse (or their assets) can use the remaining amount.


The Value of an Estate

The total value of a property, called the gross estate, includes everything owned at the time of death. This includes money, bonds, insurance, corporate interest, properties valued at fair market value (not initial value or purchase price), real estate, annuities, funds, etc.

 

Estate tax deductions

Once you've calculated your gross assets and deducted the current exemption amount, there are several ways to further reduce the amount of property tax you might owe. To determine the value of your taxable property, you can deduct any of the following from your gross property:

  • Charity Deduction: You will not owe tax on the value of any property left to a qualifying charity.

  • Estate Administration Expenses: you can deduct any amount paid for wealth management as well as the number of losses suffered by the asset during your administration. This includes fees like legal fees, appraisal fees, physical storage and custody fees, interest fees incurred after death, etc.

  • Foreign Death Taxes: if you pay tax on death in a foreign country, you can deduct the amount paid.

  • Funeral expenses: you will not pay taxes on the funeral expenses paid for your property.

  • Marriage deduction: this is one of the most common ways to avoid inheritance tax. Everything that is passed on to a surviving spouse is not taxable.

  • Mortgage and Debts Deduction: the taxable asset can be reduced by the remaining mortgage and other unpaid debts. This gives the heirs relief from the inherited debt.

  • State Death Taxes: If a state taxes your estate, you can deduct the amount paid from your taxable estate.


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