The Federal Estate Tax: Gift Your House Before Things Go South!
Have you ever wondered if Harry Potter paid taxes on the money he inherited from his parents? Maybe things work differently at Hogwarts, but here in the United States, the Federal Estate Tax can have a significant burden on individuals and families inheriting or receiving large estates. While most estates, or the total sum of one’s assets and properties, remain within the taxable threshold, a sizable tax may impact more valuable estates. Estate planning and distributing your assets ahead of death in the form of a lifetime gift can be the difference between your estate paying the tax or not. Keep reading to learn more about the Federal Estate Tax, the Gift Tax, and how to best manage your taxable estate.
What is the Federal Estate Tax?
After a decedent passes, their remaining estate may be subject to an ?estate tax, or a tax on the property you transfer at death. While Florida does not impose a state estate tax, the federal estate tax remains in play. Under the American Taxpayer Relief Act of 2012, estates may be shielded from the full tax in the form of a tax credit, which reduces the amount of the tax owed. The taxable threshold to qualify for the credit evolves yearly for inflation. As of 2024, estates valued under $13.61 million qualify for the full tax credit and become exempt from the federal estate tax. If the estates were shared by a married couple, as long as the combined estates retain a value below $27.22 million, they will avoid the federal estate tax. The tax begins at 18% on the first $10,000 of the taxable estate, and increases to a 40% rate after passing the $1 million threshold. Individuals or families with more valuable assets should plan accordingly to reduce the chance of their estate paying such a hefty fee, which could substantially diminish the inheritance as a result [1].?
How to Get Around the Federal Estate Tax?
To bypass the federal estate tax, prevent your gross estate value from exceeding the threshold by “gifting” part of your estate prior to your death. Your gross estate value refers to the total value of your properties after subtracting the value of any deductible assets. By gifting your child your house before death, you reduce the likelihood of the estate crossing the taxable threshold for the federal estate tax, as the home no longer classifies as a part of your estate [2].
What is the Gift Tax?
The gift tax applies to the transfer of both real and personal property, property rights, or interests conferred upon another. An individual has the right to bestow one gift per year up to $18,000 with no tax consequence, or up to $36,000 if a married couple jointly gifts the property to the individual. Otherwise, gifted properties in excess will be considered taxable. However, even gifts over the $18,000 limit may qualify for the tax return credit under the American Taxpayer Relief Act of 2012. One can apply the credit to gifts/properties up to the value of $1 million adjusted yearly for inflation. As of 2024, the exemption threshold stands at $13.61 million. A gift under the threshold qualifies as eligible for a tax credit. For assets that accumulate in value over time, such as a home, the taxable value becomes frozen to the value of the gift at the time of the transfer. Because the property’s value freezes at the time of the transfer, gifting your home before it reaches the threshold value can shield your property from the burden of a gift tax [3].
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Are there Exemptions to the Gift Tax?
Not all gifts exceeding the threshold value will be subject to the tax. Some “gifts” qualify as exceptions, including charitable transfers. Under I.R.C. § 2522, charitable transfers must meet certain requirements in order to fall under the exemption: the recipient must be a charity deemed qualified by state law, and the decedent, not a beneficiary of the decedent, must transfer the gift directly to the recipient. Under I.R.C. § 2523(a), transfers from one spouse to another also qualify as exempt from the gift tax, regardless of the cost. However, marital exemptions limit to non-citizen recipients to $185,000 a year [4].
?How Can Estate Planning Make a Difference?
Estate planning and organizing your assets carefully can shield your family from either the gift tax or the federal estate tax. The federal estate tax impacts property you transfer at death. Your estate will qualify as exempt from the tax by receiving a full tax credit if your gross estate value does not exceed the threshold value. The gift tax subjects gifted properties exceeding the threshold value to paying a substantial tax. If your home values at $12 million, and the rest of your estate values at $3 million, the combined estate would exceed the threshold. The estate may have to pay the tax, and your beneficiaries would consequently inherit a smaller portion of the estate. However, by gifting the home to your child before death, the home becomes exempt from the gift tax as the individual value does not exceed the threshold. The remaining estate would also be exempt from the federal tax as the remaining assets do not exceed the threshold, and your loved ones would inherit the entirety of your estate as intended.
While gifting your home to your child while alive may subject the property to the burden of a gift tax, the home will likely qualify for a tax credit if its value does not exceed the threshold, and your estate may be shielded from the Federal Estate Tax as a result. Managing your assets to prevent your taxable estate from exceeding the value limit can prevent your properties from being taxed and can ensure your beneficiaries will receive the entirety of their inheritance. ?
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