Explain the Federal Estate Tax:

The Federal Estate Tax works like this.  Every year the federal government allows people to give away a certain amount of money at death without charging taxes on that amount.  This amount is referred to as the Federal Estate Tax Exemption.  Any amount of money that a deceased person gives away at death that exceeds the Federal Estate Tax Exemption is subject to Federal Estate Tax.

What is the Federal Estate Tax for 2012?

The Federal Estate Tax Exemption for 2012 is $5.12 million and the Federal Estate Tax Rate for 2012 for estates valued over $5.12 million is 35%.  Therefore, an estate valued at $6 million would be subject to Federal Estate Tax as follows:

$5,120,000 passes to the heirs free of Federal Estate Tax

$880,000 passes subject to Federal Estate Tax at 35%

Explain the Federal Gift Tax:

The Federal Gift Tax works like this.  When one person gifts property to another, the value of that property is subject to the Federal Gift Tax.  The person making the gift is responsible for paying the Federal Gift Tax and reporting the gift to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.  The person who receives the gift is not responsible for reporting the gift.

The Federal Gift Tax is a little confusing because it has two “exclusions” or “exemptions”, one that applies on an annual basis (the “annual gift tax exclusion”) and one that applies over the taxpayer’s entire lifetime (the “lifetime gift tax exemption”).

The Annual Gift Tax Exclusion: The Annual Gift Tax Exclusion is the amount that a taxpayer can give away in any one year to any number of people free of Federal Gift Tax.  The Annual Gift Tax Exclusion for 2012 is $13,000.  For example, in 2012 you could give $13,000 each to your son, your niece and your nephew without incurring any federal gift tax. The federal gift tax rate in 2012 for a gift over $13,000 to any one person is 35%.  So if you gave your son $15,000 in 2012, you would pay a 35% gift tax rate on $2,000 ($15,000 – $13,000).

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The Lifetime Gift Tax Exemption: The Lifetime Gift Tax Exemption is the amount that a taxpayer can give away over his or her entire lifetime to any number of people free from federal gift tax but that will decrease the amount that the taxpayer can give away tax free after death.  For example, if in 2012 you gave $20,000 to your son, $20,000 to your niece and $20,000 to your nephew, your federal estate tax exemption would be as follows:

$5.12 M – [($20k – $13k) + ($20k – $13k) + ($20k – $13k)] = $5.099M

If you have questions about either the Federal Estate Tax or the Federal Gift Tax  fill out this contact form and receive a free consultation from Texas Estate Attorney Paul Romano.