Computation of the Federal Gift Tax
UPDATED: December 13, 2019
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Federal gift taxes, as well as inheritance taxes, are calculated much in the same fashion as typical property taxes or in some cases, unearned income taxes. First, the property or gift amount is assessed and given a value according to the current fair market rates. In the event of monetary gifts, the value of the gift is the total amount given. Once the amount of value has been assigned to the gift, any deductions that are permitted are made. The tax is then applied as a percentage of the valuation in order to determine how much is owed. The specific percentage assessed is determined by the IRS every year.
There are certain gifts that are not subject to gift tax. For example, gifts smaller than $15,000 to one person (or an unlimited number of individuals) in one calendar year can be made tax-free. Amounts larger than the annual exemption count against the lifetime exemption. (The federal gift tax and the federal estate tax are unified with a lifetime exclusion amount -- which figure is annually adjusted for costs of living increases. For 2019, the applicable exclusion amount is $11.4 million per individual (a married couple can shield $22.8 million). (Under the 2017 Tax Cut and Jobs Act, the basic exclusion amount for an estate tax return will revert in 2026 to the pre-2018 levels.) Further, gifts to a spouse are tax free, as are educational tuition and paying another's medical bills so long as the payment is made directly to the school or medical care provider.
If the gift is in property form, there may also be a couple of ways to lower the amount of the initial assessment. Some laws provide the opportunity to appeal the amount of the original assessment within 6 months of the gift being given, or of the death that resulted in the gifting. If the value of the property has decreased considerably within that time period, you may be able to have the amount of your tax obligation lowered, resulting in tax money being returned to you.
If you’re unsure about how much you may owe under the rules for gift tax, or need help structuring a gift to minimize tax consequences, it's in your best interest to consult with a tax attorney.