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How Do Gift Taxes Work?

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Introduction

The estate tax is imposed on the assets one owns when one dies.  If that were the only rule, then everyone could gift their assets away on their deathbeds and own nothing for the estate tax to be imposed on at death.

The gift tax was enacted to take away this easy way to avoid paying estate tax.  In essence, the gift tax “puts teeth” into the estate tax. 

How are the Estate Tax and Gift Tax Similar?

The estate tax rate is 40%.  The gift tax rate is 40% as well. The amount of the unified credit is applied first to gifts during lifetime, and then to the extent unified credit remains at a decedent’s death that credit is used to avoid estate tax.

How are the Estate and Gift Tax Different?

There are three important differences between the estate and gift tax:

  • There is an “annual gift tax exclusion” from the gift tax;
  • Payments for “qualified educational expenses” and “qualified medical expenses” are exempt from the gift tax; and
  • Gift tax payments are “tax exclusive” while estate tax payments are “tax inclusive”.

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