Lesson 23: Introduction to Gift Taxes

Welcome to Lesson 23 of our instructable on Exploring Federal Estate Tax Law. In this lesson, we will cover the basics of gift taxes, which are an essential part of estate planning.

What is a Gift Tax?

A gift tax is a federal tax applied to an individual who gives something of value to another person without receiving something of equivalent value in return. This can include money, property, or other valuable assets.

According to the IRS, a gift is "any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return."

Key Concepts of Gift Tax

Understanding gift taxes involves several key concepts:

Annual Exclusion: The amount you can give to any one person in a given year without incurring a gift tax. For more information, visit our lesson on Annual Exclusion Gifts.
Lifetime Gift Tax Exemption: The total amount you can give over your lifetime before gift taxes apply. Check out our lesson on Lifetime Gift Tax Exemption for detailed insights.
Unified Credit: A tax credit that offsets gift tax and estate tax.

Note: The annual exclusion amount is indexed for inflation and may change from year to year.

Calculating Gift Tax

Gift tax is calculated based on the value of the gift. Here's a simple formula to understand the basics:

$Gift Tax = Value of Gift - Annual Exclusion$

Exemptions and Exclusions

Several exemptions and exclusions can reduce or eliminate the gift tax liability:

Annual exclusion
Gifts to your spouse
Gifts to a political organization
Educational and medical expenses paid directly to the institution

Annual Exclusion

The annual exclusion is the amount you can give to any one person without incurring gift tax. Here is how it works:

$15,000 per recipient for the year 2021
Indexed for inflation
No limit on the number of recipients

Unified Credit

The unified credit allows individuals to transfer a significant amount of assets without paying gift or estate taxes. It covers both lifetime gifts and transfers at death.

2021 exemption amount: $11.7 million
Adjusted annually for inflation

Example Calculation

Let's consider an example to understand how gift tax is calculated:

Total gifts in 2021: $25,000
Annual exclusion: $15,000
Taxable gift: $25,000 - $15,000 = $10,000

Visualizing Gift Tax Process

graph TD; A["Gift Given"] --> B["Annual Exclusion Applied"]; B --> C["Taxable Gift Calculated"]; C --> D["Unified Credit Applied"]; D --> E["Gift Tax Due"];