Estate and Gift Taxes - The Basics
Below we summarize an explanation of estate taxes and gift taxes in the United States, their relationship, and how they function together
The estate tax is a federal tax (and sometimes state-level) levied on the total value of a deceased person’s estate—assets like cash, real estate, investments, and personal property—before distribution to heirs. It’s paid by the estate, not the recipients. Note: This is also sometimes referred to as the Inheritance Tax.
Key Basics:
Federal Exemption: In 2025, the first $13.61 million of an estate’s value is exempt from federal estate tax ($27.22 million for married couples). Only the amount above this is taxed.
Tax Rates: Taxable portions are subject to rates from 18% to 40%. For example, a $15 million estate would owe tax on $1.39 million ($15M - $13.61M), starting at 18% and scaling up.
Filing: Estates above the exemption file Form 706 within 9 months of death. Deductions (e.g., spousal transfers, charitable bequests, debts) reduce the taxable estate.
Portability: Married couples can transfer the unused exemption of the first spouse to die to the surviving spouse, preserving up to $27.22 million, if Form 706 is filed.
State Estate Taxes: Some states (e.g., New York, Maryland) have their own estate taxes with lower exemptions (e.g., $1–7 million) and rates up to 16%. States like Florida and Texas have none.
Example: If your estate is worth $20 million at death, $13.61 million is exempt, and the remaining $6.39 million is taxed, potentially owing ~$2–2.5 million at federal rates, depending on deductions.
What Are Gift Taxes?
Definition: The gift tax is a federal tax on transfers of money or property during your lifetime where you receive less than full value in return (e.g., giving without payment). It prevents people from avoiding estate taxes by giving away assets before death.Key Basics:
Annual Exclusion: In 2025, you can give $18,000 per person per year ($36,000 for couples splitting gifts) without reporting or tax consequences.
Lifetime Exemption: Gifts above the annual exclusion count against a lifetime gift tax exemption, which is unified with the estate tax exemption at $13.61 million. Only gifts exceeding this are taxed at 18–40%.
Filing: Gifts over $18,000 per recipient require Form 709 to track against the lifetime exemption, even if no tax is due.
Exclusions:
Unlimited gifts to U.S. citizen spouses.
Direct payments for medical or tuition expenses (to providers) are exempt.
Charitable gifts are generally not taxable.
State Gift Taxes: Only Connecticut has a state gift tax in 2025, with a $13.61 million exemption and rates up to 12%.
Example: If you give $30,000 to your child in 2025, $18,000 is excluded, and $12,000 reduces your lifetime exemption. No tax is owed unless your total gifts exceed $13.61 million. How Estate and Gift Taxes Relate Estate and gift taxes are interconnected through a unified tax system designed to tax wealth transfers, whether during life (gifts) or at death (estate). Here’s how they link:
Unified Exemption:
The $13.61 million exemption (2025) applies to the combined total of lifetime gifts and estate value at death. Every dollar of exemption used for gifts reduces what’s available for your estate.
Example: If you gift $5 million during your lifetime (beyond annual exclusions), your estate tax exemption drops to $8.61 million at death. For couples, portability allows the surviving spouse to use any remaining exemption from both spouses.
Tax Planning Synergy:
Gifting to Reduce Estate Taxes: Giving assets during your lifetime (within the $18,000 annual exclusion or lifetime exemption) shrinks your estate, potentially avoiding estate taxes later. For example, gifting $18,000 yearly to each of three children for 10 years removes $540,000 from your taxable estate tax-free.
Appreciation Benefits: Assets gifted early (e.g., stocks) transfer at current value, so future appreciation avoids estate taxation. If you gift $100,000 in stock that grows to $200,000, the $100,000 gain stays out of your estate.
Trusts: Irrevocable trusts can leverage gift tax rules to remove assets from your estate while benefiting heirs, though they require careful setup.
Same Tax Rates: Both taxes use the same 18–40% rate structure for amounts above the exemption, ensuring consistent taxation whether wealth is transferred via gifts or inheritance.
2026 Exemption Change: The 2017 Tax Cuts and Jobs Act doubled the exemption, but it’s set to revert to ~$7 million (inflation-adjusted) in 2026 unless extended. This affects both estate and gift taxes, prompting many to gift now to lock in the higher exemption.
Key Implications for You
Who’s Affected: Fewer than 0.2% of estates owe federal estate tax due to the high exemption, but state estate taxes or the 2026 reduction could impact more people. Gift taxes rarely apply unless you’re giving millions over your lifetime.
Your Wallet:
Estate Tax: A $15 million estate might owe $500,000–$600,000 federally after exemptions, plus state taxes in places like New York.
Gift Tax: If you gift $50,000 to a friend, you report $32,000 ($50,000 - $18,000) on Form 709, reducing your lifetime exemption but owing no tax unless you’ve used up $13.61 million.
Planning Tips:
Use annual gift exclusions to reduce your estate over time.
Consider gifting appreciating assets (e.g., real estate or stocks) early to minimize future estate taxes.
For couples, file for portability to preserve exemptions.
