Question

Explain to a business owner who doesn't understand tax, in 3-5 sentences. Give examples and expand where necessary.

What is the federal gift tax?

What is the federal estate tax?

Answer 1

Federal gift tax:

A gift tax is a federal tax applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, though they may pay an amount less than its full value. The giver of the gift is required to pay the gift tax on meeting of conditions.

The federal gift tax was created to prevent taxpayers from gifting their money and items of value to others to avoid paying taxes.

Example:

Taxpayer A gives $25,000 to B in 2020. Because the annual exclusion limit is $15,000 per person, $10,000 of the total amount given is not excluded. However, the non-excluded amount reduces the lifetime exemption amount of A.

Federal estate tax:

An estate tax is a levy on estates whose value exceeds an exclusion limit set by law. Only the amount that exceeds that minimum threshold is subject to tax. Federal estate tax is calculated based on the estate's fair market value. The federal estate tax further referred as a tax on property (cash, real estate, stock, or other assets) transferred from deceased persons to their heirs. Only the wealthiest estates pay the tax because it is levied only on the portion of an estate’s value that exceeds a specified exemption level.

For 2020, the lifetime exemption is set at $11.58 million. And this is a per person exemption. If you're married, you and your spouse can collectively exclude twice this amount from taxation, or $23.16 million

Example:

For example, If X is single and die in 2020 with assets worth a total of $13 million, only $1.42 million of X's estate would be taxable.