| Estate & Gift Tax / Federal gift tax: liability based on lifetime gifts |  |
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Unlike the income tax which is based
on taxable income for each year, the gift tax rate is based on the
cumulative amounts of taxable gifts you make over the course of your
life. Thus, as you make more and more taxable gifts, your gift tax
bracket increases. First, because of the annual
exclusion, only gifts in excess of $10,000 to each donee each year are
'taxable'. (The amount of the exclusion, which was $10,000 in 1998, will
be adjusted for inflation after 1998. However, the amount of the
exclusion will always be rounded to the next lowest multiple of $1,000,
so the $10,000 amount won't increase to $11,000 until the inflation
adjustment is at least 10%. At current levels of inflation, it may be
several years before the exclusion rises to $11,000.) Next, the gift tax on the first
$675,000 of taxable gifts you make during your life is covered by a
credit, called the unified credit. This credit wipes out the first
$220,550 of gifts tax liability. This is the liability that would arise
from $675,000 of taxable gifts. Accordingly, only after the taxable
gifts you make during your life reach $675,000 will any gift tax apply.
(The $675,000 and $220,550 amounts are the amounts that are in effect in
2001. The $675,000 amount will gradually increase until it reaches $1
million in 2006, and the $220,550 amount will increase correspondingly.)
The tax on gifts made in the current year is the tax on total lifetime
gifts minus the tax on gifts made before the current year. Example.
In 1997, the taxpayer made $750,000 in taxable gifts. The gift tax
liability on this amount was $248,300, but the unified credit of
$192,800 that was in effect in 1997 reduced the actual tax bill to
$55,500. In 1998, the taxpayer made an
additional $250,000 in taxable gifts. This brought lifetime gifts up to
$1 million ($250,000 plus the 1997 taxable gifts of $750,000). The 1998
gift tax bill was $345,800 (the gift tax on $1 million in gifts) minus
$248,300 (the gift tax on $750,000) which equaled $97,500 (39% of the
$250,000 of current gifts). Although the unified credit available in
1997 was completely used in 1997, an additional unified credit of $9,250
($202,050 minus $192,800) was available in 1998, so the amount that had
to be paid was $88,250 ($97,500 minus $9,250). In 1999, the taxpayer made an
additional $250,000 in taxable gifts. This brought lifetime gifts up to
$1,250,000. The 1999 gift tax bill was $448,300 (the gift tax on
$1,250,000 in gifts) minus $345,800 (the gift tax on the previous $1
million in gifts) which equaled $102,500 (41% of the $250,000 of current
gifts). Because an additional unified credit of $9,250 was available in
1999, the amount that had to be paid was $93,250 ($102,500 minus
$9,250). The taxpayer made no gifts in 2000. In 2001, the taxpayer makes an
additional $250,000 in taxable gifts. This brings lifetime gifts up to
$1,500,000. The 2001 gift tax bill is $555,800 (the gift tax on
$1,500,000 in gifts) minus $448,300 (the gift tax on the previous
$1,250,000 in gifts) which equals $107,500 (43% of the $250,000 of
current gifts). Because an additional unified credit of $9,250 is
available in 2001, the amount that must be paid is $98,250 ($107,500
minus $9,250). Note how the same amount of taxable giving in 1999 and 2001 ($250,000) results in a higher gift tax bill (before application of the increased unified credit) in the later year ($107,500 as compared to $102,500). This is due to the higher gift tax bracket (43%) brought into play by the higher amount of lifetime gifts. |
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