Making a gift? Be aware of the tax considerations

On the campaign trail, Donald Trump said he would get rid of the federal estate tax if elected president. So far, it’s still around.

To be sure, the estate tax only affects a small percentage of estates. But it’s part of a larger tax-planning picture that also includes two other federal taxes.

One of those is the gift tax. The other is the generation-skipping tax.

When does the gift tax apply?

The gift doesn’t apply to every gift. There is an annual exclusion from taxation for gifts of up to $14,000. For spouses that own property together, the amount is $28,000.
Gift also does not apply to gifts to a spouse, tuition or medical expenses paid for someone else and gifts to a political organization for the organization’s use.

Do annual exclusion amounts count against the total amount that is except from estate taxes?

Yes.

What is the generation-skipping tax?

The generation-skipping tax is a tax that applies to certain very large gifts. These are gifts that are larger than the amount that is exempt from estate tax, which is $5.49 million for an individual.

The tax applies to gifts larger than amount that is exempt under the estate tax, given to someone who is younger than the giver by a specified period of time. That period is defined in the law as 37 years and 6 months.

What is the purpose of the generation-skipping tax?

The premise of the tax is to discourage wealth grandparents from bypassing the estate tax by making direct transfers of money to grandchildren.

What might happen on Capitol Hill regarding estate and gift taxes?

The Trump campaign proposed eliminating the estate tax and instead having a tax on capital gains in an estate, with an exemption for the first $10 million. The campaign proposal did not address gift taxes, however, or the generation-skipping tax.

Now that the Trump administration is in office, there is lots of talk about tax reform. But President Obama’s second term started with such talk as well, and it remains to be seen which proposals may get traction in Congress.