Federal Estate Tax/Gift Tax

Question 1

What is exempt from the federal estate tax?

Answer 1

Everyone has a lifetime exception on $11.7 million that a person gives away during their life or death. Plus, there is annual exclusion which allows an individual to give as many people as they want $15,000 a year with no tax (this is not included in the $11.7 million)

Question 2

How do you calculate the federal estate tax?

Answer 2

1. Decedent’s gross estate - deductions = taxable estate.
2. taxable estate + adjusted taxable gifts = estate tax base.
3. Estate tax base x tax rate = tentative estate tax
4. Tentative estate tax - credits = tax due
   OR
   Add up everything the decedent owed at death (x). Determine the exemption amount applicable in the year of the decedent’s death ($11.7m). Deduct the exemption amount from the estate (x - $11.7m = y). Multiply the balance times the tax rate (y x 0.4 = z).

Question 3

What is the default rule for gift taxes? Are there any exceptions to this rule?

Answer 3

Any gift you make in your life or death is taxed. But there are exceptions:

1. Annual exclusion: you can give as many people as you want $15,000 a year with no tax
2. Individuals can give unlimited gifts to their spouses
3. Gifts for medical expenses and tuition payments that are paid to the provider are not taxed
4. Gifts to charity are not taxed