Lifetime Exemption from Federal Gift Taxes
The lifetime exemption for federal gift taxes has increased significantly over the years while the gift tax rate has decreased. As of 2016, the top tax rate is 40 percent, down 15 percent from 1997. The chart below shows the changes in the lifetime gift tax exemption and top gift tax rate over the years.
History of the Gift Tax Rate and the Lifetime Exemption
Tax years 2010 through 2012 were based on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, known as "TRUIRJCA." The TRUIRJCA was signed into law by President Barack Obama on December 17, 2010.
The law was only supposed to be in effect for two years, but President Obama signed the American Taxpayer Relief Act, known as ATRA, into law on January 2, 2013, making certain provisions under the TRUIRJCA permanent. These provisions affect federal estate taxes and gift taxes.
Federal estate and gift taxes will stay in place going forward, but they've been indexed for inflation -- they're adjusted periodically to keep pace with the economy. The top estate and gift tax rate increased from 35 percent under the TRUIRJCA to 40 percent under the ATRA, where it remains as of 2016. This is still significantly less than it was in 1997.
Historical Federal Gift Tax Lifetime Exemptions and Rates
|Year||Gift Tax Exemption||Top Gift Tax Rate|
The exemption amount increased to $5.45 million in 2016, but the top tax rate remains steady at 40 percent.
How the Lifetime Gift Tax Exclusion Works
Don't confuse the lifetime gift tax exclusion with the annual gift tax exclusion. They're two separate things, although they work in tandem and interact with the federal estate tax as well.
The annual exclusion is $14,000 as of 2016. You can give away this much money or property to any one individual per year without incurring a gift tax. If you want to give gifts to two people, they can total $28,000. You can give $42,000 to three people, and so on. This exclusion was also indexed for inflation under the ATRA, so it may go up in future years.
If you give someone $20,000 in one calendar year, you have a choice to make. You can either pay the gift tax on the additional $6,000 over the annual exclusion, or you can let your lifetime exemption of $5.45 million cover it.
The Unified Tax Credit
The federal gift tax and estate tax are tied together by something called the Unified Tax Credit. The credit is one single $5.45 million exclusion. You can use it to shelter your estate from taxation when you die, or you can use it to defray the tax burden of giving more than the annual gift tax exclusion amount to any individual per year.
If you decide not to pay the gift tax on that extra $6,000 you gave away, you must file a gift tax return anyway, Form 709, and indicate on the return that you want to use your lifetime exemption provided by the Unified Tax Credit.
This is a comparatively modest reduction in the credit -- $6,000 would hardly be missed from a $5.45 million exemption.
If you have nowhere near $5 million-plus in assets, this may be a good deal. But if you expect to have considerable wealth by the time you die, enough that the $5.45 million Unified Tax Credit might not shelter your entire estate from estate taxes, using it to cover gifts in excess of the annual inclusion might put your estate at risk. The top federal estate tax rate is also 40 percent.
The bottom line: If you're an average American, the lifetime gift tax exclusion will let you give away a lot of money and property tax-free. If you expect that your estate will be more sizable, consult with a CPA or a tax attorney before deciding to use the exclusion.
To view the annual exclusion from gift taxes for the years 1997 through 2015, please refer to Table Showing Annual Exclusion From Gift Taxes: 1997 - 2015.
To view the federal estate tax exemptions and top estate tax rates from 1916 (the first year the estate tax was enacted) through 1997, please refer to Table Showing Federal Estate Tax Exemption and Rate: 1916 - 1997.
To view the federal estate tax exemptions and top estate tax rates from 1997 through 2015, please refer to Table Showing Federal Estate Tax Exemption and Rate: 1997 - 2015.