How is the federal gift tax liability is determined? 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 $11,000 to each donee are “taxable” in 2004.
Next, the gift tax on the first $1 million of taxable
gifts you make during your life is covered by a gift tax
credit. This credit wipes out the first $345,800 of gift
tax liability. This is the liability that would arise from
$1 million of taxable gifts. Accordingly, only after the
taxable gifts you make during your life reach $1 million
will any gift tax apply. 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.
The taxpayer made no taxable gifts before 2001.
In 2001, the taxpayer made $750,000 in potentially taxable
gifts. The gift tax liability on this amount was $248,300,
but the credit of $220,550 that was in effect in 2001 (exempting
$675,000) reduced the actual tax bill to $27,750.
In 2004, the taxpayer makes an additional $250,000 in
potentially taxable gifts. This brings lifetime gifts up
to $1 million. The actual 2004 gift tax bill is zero, because
of the increased gift tax credit of $345,800 (a $125,250
increase over the 2001 credit amount; $345,800 effectively
exempts $1 million of gifts). But before application of
the gift tax credit, the 2004 gift tax liability would be
$345,800: a $248,300 gift tax liability in 2001 plus $97,500
on the 2004 gift of $250,000 taxed at a marginal bracket
I should also note that under federal tax legislation enacted
in 2001, the estate tax is repealed, effective 2010. However,
the gift tax was not repealed, presumably to discourage
taxpayers from making transfers to related taxpayers in
lower income brackets. Therefore, the gift tax promises
to remain a powerful consideration in the structuring of
lifetime dispositions and in estate planning.