Whether you gift money with a personal check or bequeath property with a will or trust, the Internal Revenue Service will take an interest if the amount or market value of the transfer is large enough. The federal gift and estate tax rules work together to ensure that individuals cannot evade IRS levies on their estate simply by giving away property before they die. There is a substantial minimum amount that you'll have to surpass, however, before any taxes on the transfer are due.
The Gift that Brings on Taxes
IRS rules place a tax on transfers of money or property for no consideration, meaning a gift. As of 2015, the giver pays a tax if gifts to a single individual exceed $14,000 in a single year, either in cash or in the fair market value of property. This exclusion amount applies on an individual basis, meaning couples can gift $28,000 tax-free. If you make gifts out to several individuals, the tax does not apply to the combined amount. In addition, you can exclude any amount given for medical or educational expenses, and gifts to your spouse. If your gifts exceed the exclusion amount, fill out IRS Form 709 to declare the amount.
You still may not owe tax if you haven't exceeded the combined lifetime exemption that applies to estates and gifts, which was $5.43 million as of 2015.
The State of Estate Taxes
Estate taxes apply to property belonging to a deceased individual. The IRS collects the tax before any part of the estate passes to the heirs. The lifetime exemption of $5.43 million means that estates up to that size are exempt from federal tax -- though that is far from permanent. Follow the news on estate taxes closely, as the exemption amount changes frequently through inflation adjustments by the IRS or with new laws passed by Congress.
In addition, your estate may owe additional funds to a state treasury,if you live in one of several jurisdictions that also collect a "death tax." As of 2015, this list included Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont and Washington, as well as the District of Columbia. These states have their own exclusion amounts, rates, and ongoing changes. In Minnesota, for example, the top rate on estates is 16 percent, and the exemption of $1.4 million was scheduled to rise to $1.6 million in 2016.
An inheritance tax is a levy on property you receive as the beneficiary of an estate. There's no inheritance tax at the federal level, but as of 2015 inheritance taxes loomed in Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Many states not only set exemption amounts, but also exclude certain individuals, such as spouses or immediate family members, from paying inheritance tax. If you're a non-resident, you still may be subject to inheritance tax, as well as federal estate tax, on U.S. assets, even if those assets are held in a foreign account.