How Much Is Tax On Gift Money? Understanding Gift Tax

Understanding gift tax can be tricky, but How Much Is Tax On Gift Money is a crucial question for both givers and receivers. money-central.com provides a clear breakdown, helping you navigate gift tax rules, avoid complications, and make informed financial decisions. By understanding the gift tax landscape, you can ensure compliance and potentially minimize tax implications on your assets.

1. What Is Gift Tax and How Does It Work?

Gift tax is a federal tax on the transfer of property or money to another person while receiving nothing, or less than full value, in return. The IRS (Internal Revenue Service) imposes this tax to prevent people from avoiding estate tax by giving away their assets before death. Let’s delve deeper into the mechanics of this tax and how it functions.

The Basics: Gift tax applies to transfers of property where you don’t receive equal value in return. This includes cash, stocks, real estate, and other assets.
Annual Exclusion: The IRS allows you to gift a certain amount each year to any number of individuals without incurring gift tax. For 2024, this annual gift tax exclusion is $18,000 per person.
Lifetime Exemption: In addition to the annual exclusion, there is a lifetime gift and estate tax exemption. This is a cumulative amount that applies to the total value of gifts you give during your lifetime and the value of your estate at death. For 2024, the lifetime gift and estate tax exemption is $13.61 million per individual.
Who Pays the Tax?: Generally, the donor (the person giving the gift) is responsible for paying the gift tax. If the donor doesn’t pay, the recipient (the person receiving the gift) may be liable.
Filing Requirements: If you give gifts exceeding the annual exclusion to any individual, you must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, to report the gifts, even if you don’t owe any gift tax because of the lifetime exemption.
Tax Rate: The gift tax rate is the same as the estate tax rate, ranging from 18% to 40%, depending on the amount of the gift.

To illustrate, consider this scenario:

John gifts $25,000 to his daughter in 2024. The annual exclusion is $18,000, so $7,000 exceeds the exclusion. John needs to report this $7,000 on Form 709. However, he won’t pay any gift tax unless he has already exceeded his lifetime exemption of $13.61 million.

1.1. How Does the Annual Gift Tax Exclusion Work?

The annual gift tax exclusion is a cornerstone of gift tax planning, allowing individuals to transfer wealth without incurring gift tax. Here’s a comprehensive explanation:

What it is: The annual gift tax exclusion is the amount you can give to any individual during a calendar year without having to pay gift tax or even report the gift on a gift tax return.
Current Amount: For 2024, the annual exclusion is $18,000 per recipient. This amount is adjusted annually for inflation.
Per-Person, Per-Year Basis: You can gift up to $18,000 to as many individuals as you like each year. For instance, you could give $18,000 to each of your children, grandchildren, and friends without triggering gift tax.
No Cumulative Effect: If you don’t use the full annual exclusion in one year, you can’t carry it over to the next year. Each year, the exclusion resets.
Married Couples: Married couples can combine their annual exclusions, effectively gifting up to $36,000 per recipient each year. This is known as gift splitting. Both spouses must consent to gift splitting, and it must be reported on Form 709.
Gifts That Qualify: The gift must be a present interest, meaning the recipient has immediate access to and use of the gifted property.
Examples of Qualifying Gifts:
- Cash gifts
- Stocks or bonds transferred to an individual
- Paying for someone’s tuition or medical expenses (when paid directly to the institution)
Gifts That Don’t Qualify:
- Future interests, such as gifts that the recipient can’t use until a later date
- Promises to give a gift in the future
- Gifts to certain types of trusts
Reporting Requirements: Gifts under the annual exclusion do not need to be reported on Form 709. However, if you and your spouse split a gift, you must report it, even if the total gift is under $36,000.

1.2. What Is the Lifetime Gift and Estate Tax Exemption?

The lifetime gift and estate tax exemption is another critical element in understanding gift tax. It allows individuals to transfer a significant amount of assets during their lifetime or at death without incurring federal gift or estate tax.

Unified Exemption: The lifetime gift and estate tax exemption is a unified credit, meaning it applies to both gifts made during your lifetime and the value of your estate at death.
Current Amount: For 2024, the lifetime gift and estate tax exemption is $13.61 million per individual. This is a substantial amount, meaning that most people will not owe federal gift or estate tax.
How It Works: When you make gifts exceeding the annual exclusion, you must report them on Form 709. These gifts reduce your available lifetime exemption. If the total of your taxable gifts (gifts exceeding the annual exclusion) exceeds the lifetime exemption, you will owe gift tax.
Estate Tax Implications: Any portion of the lifetime exemption not used during your lifetime is available to offset estate tax at the time of your death.
Portability: Under current law, a surviving spouse can use any unused portion of the deceased spouse’s lifetime exemption. This is known as portability. To take advantage of portability, the executor of the deceased spouse’s estate must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, even if no estate tax is due.
Future Changes: The lifetime gift and estate tax exemption is subject to change based on legislation. Under current law, the exemption is scheduled to revert to $5 million (adjusted for inflation) in 2026.
Example: Suppose Sarah gifts $1 million to her son in 2024. She must report this gift on Form 709. Her remaining lifetime exemption is reduced to $12.61 million ($13.61 million – $1 million). If Sarah’s estate is worth $12 million at her death, no estate tax will be due because it is less than her remaining exemption.

1.3. Common Misconceptions About Gift Tax

Gift tax is often misunderstood. Here are some common misconceptions:

Myth: I have to pay gift tax on every gift I give.
- Reality: You only need to pay gift tax if you exceed the annual exclusion ($18,000 per recipient in 2024) and your lifetime gift and estate tax exemption ($13.61 million in 2024).
Myth: The person receiving the gift pays the gift tax.
- Reality: Generally, the donor (the person giving the gift) is responsible for paying the gift tax. However, the recipient may be liable if the donor does not pay.
Myth: Gifts to family members are always tax-free.
- Reality: Gifts to family members are subject to the same gift tax rules as gifts to anyone else. The annual exclusion and lifetime exemption apply regardless of the relationship between the donor and recipient.
Myth: I can avoid gift tax by giving gifts in cash.
- Reality: Cash gifts are subject to the same gift tax rules as other types of gifts. The type of asset you give does not affect whether gift tax applies.
Myth: I don’t need to report gifts under $18,000.
- Reality: Generally, you don’t need to report gifts under $18,000. However, if you and your spouse split a gift, you must report it, even if the total gift is under $36,000.
Myth: Paying someone’s medical bills or tuition is subject to gift tax.
- Reality: Payments made directly to a medical or educational institution are not considered taxable gifts, regardless of the amount.
Myth: If I give a gift and pay gift tax, the recipient doesn’t have to pay income tax on it.
- Reality: Gifts are not considered income to the recipient. The recipient does not have to pay income tax on the gift, even if the donor pays gift tax.

2. What Types of Transfers Are Considered Taxable Gifts?

Understanding what constitutes a taxable gift is essential for compliance with gift tax laws. Not all transfers are considered gifts, and some have special rules. Here’s a breakdown:

Cash Gifts: Cash gifts are the most straightforward type of gift. If you give someone cash and receive nothing of equal value in return, it’s considered a gift.
Property Gifts: Gifts of property, such as real estate, stocks, bonds, artwork, and vehicles, are also subject to gift tax. The value of the gift is the fair market value of the property on the date of the gift.
Below-Market Loans: If you lend money to someone at an interest rate below the applicable federal rate (AFR), the difference between the AFR and the interest rate you charge is considered a gift.
Forgiveness of Debt: If you forgive a debt owed to you, it’s considered a gift to the debtor.
Transferring Property for Less Than Fair Market Value: If you sell property to someone for less than its fair market value, the difference between the sale price and the fair market value is considered a gift.
Creating or Funding a Trust: When you create or fund a trust for the benefit of someone else, it can be considered a gift, depending on the terms of the trust.
Paying Someone Else’s Expenses: Paying someone else’s expenses, such as rent or utilities, can be considered a gift, unless it’s for support that you’re legally obligated to provide.
Joint Bank Accounts: When you deposit money into a joint bank account with someone else, it can be considered a gift to the extent that the other person has the right to withdraw the money for their own benefit.

2.1. Are There Any Exceptions to the Gift Tax Rule?

Yes, there are several exceptions to the gift tax rule. These exceptions allow you to transfer assets without incurring gift tax. Here are the main exceptions:

Annual Exclusion: As mentioned earlier, you can give up to $18,000 per recipient each year without incurring gift tax.
Direct Payments for Tuition: Payments made directly to an educational institution for someone else’s tuition are not considered taxable gifts. This exclusion applies to tuition only, not to room and board, books, or other expenses.
Direct Payments for Medical Expenses: Payments made directly to a medical provider for someone else’s medical expenses are not considered taxable gifts. This exclusion applies to medical expenses only, not to other types of expenses.
Gifts to a Spouse: Gifts to a U.S. citizen spouse are not subject to gift tax due to the unlimited marital deduction. Gifts to a non-citizen spouse are subject to different rules and may be taxable.
Gifts to Charity: Gifts to qualified charities are deductible for income tax purposes and are not subject to gift tax.
Political Organizations: Gifts to political organizations are not subject to gift tax.
Support Obligations: Payments made to support someone you’re legally obligated to support, such as a child, are not considered gifts.
Business Transfers: Transfers that are made in the ordinary course of business are not considered gifts. For example, if you sell goods or services to someone at a fair price, it’s not a gift.

2.2. What About Gifts to Family Members?

Gifts to family members are subject to the same gift tax rules as gifts to anyone else. The annual exclusion and lifetime exemption apply regardless of the relationship between the donor and recipient. However, there are a few special considerations for gifts to family members:

Gift Splitting: Married couples can combine their annual exclusions, effectively gifting up to $36,000 per recipient each year. This is often used when giving gifts to children or grandchildren.
Education and Medical Expenses: As mentioned earlier, direct payments for tuition and medical expenses are not considered taxable gifts. This can be a valuable way to help family members without incurring gift tax.
Loans to Family Members: If you lend money to a family member, it’s important to charge interest at or above the applicable federal rate (AFR) to avoid the loan being considered a gift.
Gifts of Appreciated Property: When giving gifts of appreciated property, such as stocks or real estate, the recipient will take your basis in the property. This means that if they later sell the property, they will owe capital gains tax on the appreciation that occurred during your ownership.
Estate Planning: Gifts to family members can be an important part of estate planning. By making gifts during your lifetime, you can reduce the size of your estate and potentially lower estate tax.

2.3. How Are Gifts Valued for Tax Purposes?

The value of a gift for tax purposes is its fair market value on the date of the gift. Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Here’s how to determine the fair market value of different types of gifts:

Cash: The value of a cash gift is simply the amount of cash given.
Publicly Traded Stocks and Bonds: The value of publicly traded stocks and bonds is the average of the high and low trading prices on the date of the gift.
Real Estate: The value of real estate can be determined by an appraisal from a qualified appraiser. Other methods include comparable sales data and property tax assessments.
Vehicles: The value of a vehicle can be determined by using pricing guides such as Kelley Blue Book or NADAguides.
Artwork and Collectibles: The value of artwork and collectibles can be determined by an appraisal from a qualified appraiser.
Closely Held Business Interests: The value of closely held business interests can be complex to determine and often requires the assistance of a valuation expert.
Life Insurance Policies: The value of a life insurance policy is generally its cash surrender value on the date of the gift.

It’s important to keep good records of the value of gifts, as well as any appraisals or other documentation used to determine the value. This will help you support the values reported on Form 709.

3. Understanding IRS Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return

Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, is used to report gifts that exceed the annual exclusion and to calculate any gift tax owed. Here’s a detailed guide to understanding and completing this form:

Who Needs to File: You need to file Form 709 if you give gifts to any individual that exceed the annual exclusion ($18,000 in 2024). You also need to file Form 709 if you and your spouse split a gift, even if the total gift is under $36,000.
When to File: Form 709 is due on April 15th of the year following the year in which the gifts were made. If you file an extension for your income tax return, you automatically get an extension to file Form 709.
Where to File: Form 709 is filed with the IRS. You can find the address to mail the form in the instructions. You can also e-file Form 709 using tax preparation software or through a tax professional.
Key Sections of Form 709:
- Part 1 – General Information: This section asks for your name, address, Social Security number, and other basic information.
- Part 2 – Tax Computation: This section is used to calculate the amount of gift tax you owe.
- Part 3 – Gifts Subject to Gift Tax: This section is used to list all the gifts you made during the year that exceed the annual exclusion.
- Part 4 – Taxable Gift Reconciliation: This section is used to reconcile the gifts you made during the year with your lifetime gift and estate tax exemption.
- Schedule A – Computation of Taxable Gifts: This schedule is used to provide more detailed information about the gifts you made during the year.
- Schedule B – Gifts From Prior Periods: This schedule is used to report gifts you made in prior years that reduced your lifetime gift and estate tax exemption.
- Schedule C – Generation-Skipping Transfers: This schedule is used to report generation-skipping transfers, which are gifts made to grandchildren or other younger generations.
Instructions for Completing Form 709: The IRS provides detailed instructions for completing Form 709. Be sure to read the instructions carefully before completing the form.
Common Mistakes to Avoid:
- Failing to report all gifts that exceed the annual exclusion.
- Incorrectly valuing gifts.
- Failing to claim the annual exclusion.
- Failing to claim the lifetime gift and estate tax exemption.
- Failing to file Form 709 on time.
Professional Assistance: If you’re unsure how to complete Form 709, consider seeking assistance from a tax professional.

3.1. Step-by-Step Guide to Filling Out Form 709

Filling out Form 709 can be complex, but breaking it down into steps can make the process more manageable. Here’s a step-by-step guide:

Gather Your Information: Before you start, gather all the necessary information, including your Social Security number, the names and addresses of the recipients of your gifts, and the values of the gifts.
Complete Part 1 – General Information: Fill out your name, address, Social Security number, and other basic information.
Complete Part 2 – Tax Computation: This section is used to calculate the amount of gift tax you owe. You’ll need to refer to the tax rate schedule in the instructions to determine the appropriate tax rate.
Complete Part 3 – Gifts Subject to Gift Tax: List all the gifts you made during the year that exceed the annual exclusion. For each gift, provide the recipient’s name and address, a description of the gift, the date of the gift, and the value of the gift.
Complete Part 4 – Taxable Gift Reconciliation: This section is used to reconcile the gifts you made during the year with your lifetime gift and estate tax exemption. You’ll need to calculate the total amount of taxable gifts and subtract your available exemption to determine whether you owe any gift tax.
Complete Schedule A – Computation of Taxable Gifts: This schedule is used to provide more detailed information about the gifts you made during the year. You’ll need to provide information about the type of property gifted, its location, and any deductions or exclusions you’re claiming.
Complete Schedule B – Gifts From Prior Periods: This schedule is used to report gifts you made in prior years that reduced your lifetime gift and estate tax exemption.
Complete Schedule C – Generation-Skipping Transfers: This schedule is used to report generation-skipping transfers, which are gifts made to grandchildren or other younger generations.
Review and Sign: Review the completed form carefully to make sure everything is accurate. Sign and date the form.
File the Form: File Form 709 with the IRS by the due date. You can find the address to mail the form in the instructions. You can also e-file Form 709 using tax preparation software or through a tax professional.

3.2. What Documentation Is Needed When Filing Form 709?

When filing Form 709, it’s important to include documentation to support the information you’re reporting. Here’s a list of documentation that may be required:

Gift Tax Returns From Prior Years: If you’ve filed gift tax returns in prior years, include copies of those returns.
Appraisals: If you gifted property, such as real estate, artwork, or collectibles, include appraisals from qualified appraisers to support the values you’re reporting.
Stock and Bond Statements: If you gifted stocks or bonds, include statements showing the trading prices on the date of the gift.
Vehicle Valuation Guides: If you gifted a vehicle, include a printout from Kelley Blue Book or NADAguides showing the vehicle’s value.
Trust Documents: If you created or funded a trust, include a copy of the trust document.
Loan Documents: If you made a loan to someone, include a copy of the loan agreement.
Power of Attorney: If you’re filing Form 709 on behalf of someone else, include a copy of the power of attorney.
Death Certificate: If you’re filing Form 709 for a deceased person, include a copy of the death certificate.
Other Supporting Documents: Include any other documents that support the information you’re reporting on Form 709.

3.3. Consequences of Not Filing Form 709 or Filing It Incorrectly

Failing to file Form 709 or filing it incorrectly can have serious consequences. Here are some of the potential penalties:

Failure-to-File Penalty: If you fail to file Form 709 by the due date, you may be subject to a failure-to-file penalty. The penalty is 5% of the unpaid tax for each month or part of a month that the return is late, up to a maximum of 25% of the unpaid tax.
Failure-to-Pay Penalty: If you fail to pay the gift tax owed, you may be subject to a failure-to-pay penalty. The penalty is 0.5% of the unpaid tax for each month or part of a month that the tax remains unpaid, up to a maximum of 25% of the unpaid tax.
Accuracy-Related Penalty: If you understate the value of gifts on Form 709, you may be subject to an accuracy-related penalty. The penalty is 20% of the underpayment of tax.
Fraud Penalty: If you intentionally understate the value of gifts on Form 709 or otherwise attempt to evade gift tax, you may be subject to a fraud penalty. The penalty is 75% of the underpayment of tax.
Interest: Interest is charged on any unpaid gift tax from the due date of the return until the tax is paid.
Loss of Lifetime Exemption: If you fail to report gifts on Form 709, you may lose the ability to use your lifetime gift and estate tax exemption to offset future gift or estate tax.

4. Gift Tax Planning Strategies

Effective gift tax planning can help you minimize or avoid gift tax while still achieving your wealth transfer goals. Here are some strategies to consider:

Maximize Annual Exclusion Gifts: Make full use of the annual gift tax exclusion each year. This allows you to transfer wealth without incurring gift tax or using up your lifetime exemption.
Gift Splitting: If you’re married, consider gift splitting with your spouse. This allows you to combine your annual exclusions and gift up to $36,000 per recipient each year.
Direct Payments for Tuition and Medical Expenses: Pay tuition and medical expenses directly to the educational or medical institution. These payments are not considered taxable gifts.
Use of Trusts: Trusts can be used to make gifts while retaining some control over the assets. For example, you could create an irrevocable life insurance trust (ILIT) to hold a life insurance policy. The premiums paid on the policy would be considered gifts, but the death benefit would not be included in your estate.
Qualified Personal Residence Trust (QPRT): A QPRT is a type of trust that allows you to transfer your home to your heirs while continuing to live in it for a set period of time. This can be a valuable way to reduce estate tax.
Grantor Retained Annuity Trust (GRAT): A GRAT is a type of trust that allows you to transfer assets to your heirs while retaining an annuity for a set period of time. If the assets appreciate faster than the IRS’s interest rate, the excess appreciation will pass to your heirs tax-free.
Intentionally Defective Grantor Trust (IDGT): An IDGT is a type of trust that is designed to be disregarded for income tax purposes but recognized for estate tax purposes. This allows you to transfer assets to the trust without incurring gift tax, while still paying income tax on the trust’s income. This can be a valuable way to reduce estate tax.
Gifts of Appreciated Property: Consider gifting appreciated property, such as stocks or real estate, to family members in lower tax brackets. This can help reduce the overall tax burden on the family.
Charitable Gifts: Make charitable gifts to reduce your taxable estate and support your favorite causes.

4.1. Gifting Strategies for High-Net-Worth Individuals

High-net-worth individuals often require more sophisticated gift tax planning strategies. Here are some options:

Dynasty Trusts: Dynasty trusts are designed to last for multiple generations, providing a way to transfer wealth to future generations without incurring estate tax.
Private Foundations: Private foundations can be used to make charitable gifts while retaining control over how the funds are used.
Family Limited Partnerships (FLPs): FLPs can be used to transfer ownership of a family business or other assets to family members while retaining control over the assets.
Advanced Life Insurance Planning: Life insurance can be used to provide liquidity to pay estate tax or to fund other estate planning goals.
Defined Value Clauses: Defined value clauses can be used to ensure that the value of a gift does not exceed a certain amount. This can be helpful when gifting assets that are difficult to value.

4.2. How to Utilize Trusts in Gift Tax Planning

Trusts are powerful tools in gift tax planning, offering flexibility and control over how assets are transferred. Here’s how to utilize trusts effectively:

Irrevocable Life Insurance Trust (ILIT): An ILIT is used to hold a life insurance policy. The premiums paid on the policy are considered gifts, but the death benefit is not included in your estate.
Qualified Personal Residence Trust (QPRT): A QPRT allows you to transfer your home to your heirs while continuing to live in it for a set period of time. This can be a valuable way to reduce estate tax.
Grantor Retained Annuity Trust (GRAT): A GRAT allows you to transfer assets to your heirs while retaining an annuity for a set period of time. If the assets appreciate faster than the IRS’s interest rate, the excess appreciation will pass to your heirs tax-free.
Intentionally Defective Grantor Trust (IDGT): An IDGT is designed to be disregarded for income tax purposes but recognized for estate tax purposes. This allows you to transfer assets to the trust without incurring gift tax, while still paying income tax on the trust’s income. This can be a valuable way to reduce estate tax.
Dynasty Trust: A dynasty trust is designed to last for multiple generations, providing a way to transfer wealth to future generations without incurring estate tax.

4.3. The Role of Appraisals in Gift Tax Planning

Appraisals play a crucial role in gift tax planning, especially when gifting property such as real estate, artwork, or closely held business interests. Here’s why appraisals are important:

Determining Fair Market Value: The value of a gift for tax purposes is its fair market value on the date of the gift. An appraisal from a qualified appraiser can help determine the fair market value of the property.
Supporting Values Reported on Form 709: When you file Form 709, you’ll need to report the value of the gifts you made during the year. An appraisal can help support the values you’re reporting and reduce the risk of an audit.
Avoiding Penalties: If you understate the value of gifts on Form 709, you may be subject to penalties. An appraisal can help you avoid these penalties by ensuring that you’re reporting accurate values.
Choosing a Qualified Appraiser: It’s important to choose a qualified appraiser who has experience valuing the type of property you’re gifting. The appraiser should be independent and objective.

5. How Does State Gift Tax Differ From Federal Gift Tax?

While the federal government imposes a gift tax, not all states do. Understanding the differences between state and federal gift tax is important for comprehensive tax planning. Here’s an overview:

Federal Gift Tax: As discussed earlier, the federal gift tax applies to gifts that exceed the annual exclusion ($18,000 in 2024) and can trigger gift tax if the lifetime gift and estate tax exemption ($13.61 million in 2024) is exceeded.
State Gift Tax: Most states do not have a gift tax. As of 2024, only Connecticut imposes a state gift tax.
Connecticut Gift Tax: Connecticut’s gift tax applies to gifts that exceed the annual exclusion and is coordinated with the state’s estate tax. The gift tax rate is the same as the estate tax rate.
State Estate Tax: While most states don’t have a gift tax, many have an estate tax. The estate tax is a tax on the transfer of property at death. The estate tax rates and exemption amounts vary by state.
Coordination With Federal Tax: Some states coordinate their estate tax with the federal estate tax. This means that the state’s estate tax exemption amount is the same as the federal exemption amount.
Planning Considerations: When planning for gift and estate tax, it’s important to consider both federal and state laws. If you live in a state with an estate tax, you may need to take steps to minimize your state estate tax liability.

5.1. States With Gift Tax

As of 2024, only one state imposes a gift tax:

Connecticut: Connecticut’s gift tax applies to gifts that exceed the annual exclusion and is coordinated with the state’s estate tax. The gift tax rate is the same as the estate tax rate.

5.2. States With Estate Tax

While most states don’t have a gift tax, many have an estate tax. Here’s a list of states with estate tax as of 2024:

Connecticut
Hawaii
Illinois
Maine
Maryland
Massachusetts
Minnesota
New York
Oregon
Rhode Island
Vermont
Washington

The estate tax rates and exemption amounts vary by state. It’s important to check the specific laws in your state to determine your estate tax liability.

5.3. Impact of State Laws on Overall Gift Tax Strategy

State laws can have a significant impact on your overall gift tax strategy. Here’s how:

State Estate Tax: If you live in a state with an estate tax, you may need to take steps to minimize your state estate tax liability. This could include making gifts during your lifetime to reduce the size of your estate.
State Gift Tax: If you live in Connecticut, you’ll need to consider the state gift tax when making gifts. This could affect the timing and amount of your gifts.
State Income Tax: State income tax laws can also affect your gift tax strategy. For example, if you gift appreciated property to a family member in a lower tax bracket, it could reduce the overall tax burden on the family.
Residency Planning: Some individuals move to states with no estate tax to avoid state estate tax. This is known as residency planning.
Professional Advice: Given the complexity of state and federal gift and estate tax laws, it’s important to seek professional advice from a qualified attorney or tax advisor.

6. Gift Tax vs. Estate Tax: What’s The Difference?

Gift tax and estate tax are both taxes on the transfer of wealth, but they apply in different situations. Understanding the differences between these two taxes is crucial for effective estate planning.

Gift Tax: Gift tax is a federal tax on the transfer of property or money to another person while receiving nothing, or less than full value, in return. It applies to gifts made during your lifetime.
Estate Tax: Estate tax is a federal tax on the transfer of property at death. It applies to the value of your estate, which includes all of your assets, less any deductions for debts, expenses, and bequests.
Unified Exemption: The gift tax and estate tax share a unified lifetime exemption. This means that the same exemption amount applies to both gifts made during your lifetime and the value of your estate at death. For 2024, the unified lifetime gift and estate tax exemption is $13.61 million per individual.
Tax Rates: The gift tax rate and the estate tax rate are the same, ranging from 18% to 40%, depending on the amount of the gift or the value of the estate.
Who Pays the Tax?: Generally, the donor (the person giving the gift) is responsible for paying the gift tax. The executor of the estate is responsible for paying the estate tax.
Filing Requirements: If you give gifts exceeding the annual exclusion to any individual, you must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, to report the gifts. The executor of an estate must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, if the value of the estate exceeds the lifetime exemption.
Purpose: The gift tax is designed to prevent people from avoiding estate tax by giving away their assets before death.
Planning Considerations: Effective estate planning involves considering both gift tax and estate tax. By making gifts during your lifetime, you can reduce the size of your estate and potentially lower estate tax.

6.1. Key Differences Summarized

Here’s a table summarizing the key differences between gift tax and estate tax:

Feature	Gift Tax	Estate Tax
When It Applies	Transfers of property or money during lifetime	Transfers of property at death
Taxable Event	Giving a gift that exceeds the annual exclusion	Death of an individual with an estate exceeding the exemption amount
Exemption	Unified lifetime gift and estate tax exemption ($13.61 million in 2024)	Unified lifetime gift and estate tax exemption ($13.61 million in 2024)
Tax Rates	18% to 40%	18% to 40%
Who Pays	Donor (person giving the gift)	Executor of the estate
Filing Form	Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return	Form 70