There seems to be a tax consideration for almost every transaction in your life. Getting married, having children, going to college, starting a business, buying a car are just some examples. Gifts that you give and receive are no exception. The main difference between Estate and Gift tax is -- Gift tax applies to lifetime gifts; Estate tax applies to assets left at death.
What is a gift?
A gift is any transfer for which you receive nothing, or less than "fair market value," in return. For example, if you hand someone a check for $1,000, that's a gift. And if your house would fetch $100,000 on the open market but you sell it to your son for $10,000, you have made a $90,000 gift to him.
There are many items that are not considered a "taxable" gift. These can include:
- Tuition, if you pay it directly to the school (other expenses related to education, such as books, supplies and living expenses, do not qualify for this exemption)
- Medical expenses you pay directly
- Gifts to your spouse (if your spouse is a U.S. citizen)
- Gifts to a political organization for its use
- Gifts to certain charities
For 2014, the Gift Tax kicks in after the gifts you give to each individual total more than $14,000 for the year. In other words, you can give each of your children $14,000 with no tax implications. Your spouse can also give $14,000 to each child.
If a gift is taxable, the person who makes the gift, not the recipient, must file a gift tax return and pay any tax owed. However, very few people end up paying gift tax during their lifetime because gift tax is not owed until your cumulative taxable gifts exceed the $5.34 million exemption.
At someone's death, federal estate tax is calculated. In addition to the property left behind (the estate), the amount of taxable lifetime gifts is included in the total that may be subject to estate tax. Again, no tax is due unless the taxable estate exceeds the exempt amount.
What's the gift tax rate? The current federal gift/estate tax rate is 40%.
There are currently only 2 states that have a state gift tax, Connecticut and Minnesota.