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Generally speaking, each individual taxpayer is allocated a dollar amount to give away during his or her lifetime and bequeath at death to avoid a federal transfer tax. For 2022, that dollar amount is $12,060,000, which is referred to as the federal basic exclusion amount (also known as “estate and gift tax exemption”).  This exclusion or exemption amount correlates to an actual tax amount known as the “applicable credit” (formerly “unified credit”). For 2022, the $12,060,000 exclusion produces an Estate Tax or/and Gift Tax of $4,769,800 (“credit”).

Form 709, US Gift Tax Return, and Form 706, US Estate Tax Return work in tandem with one another.  A taxpayer will file Form 709 during his/her lifetime to report taxable gifts and usage of the exemption (currently the $12,060,000). At death, the taxpayer’s representative will then file a Form 706 (if necessary), by reporting assets held at death, subtracting appropriate deductions, and adding taxable gifts as reported on Form 709s filed during his/her lifetime. A tax (currently maximum tax rate is 40%) will be computed on that total, then the applicable credit will be applied against the tax computed. Any tax in excess of the applicable credit will be owed by the Estate.

The above doesn’t consider Generation Skipping Tax (GST), Gift Tax Annual Exclusion, Portability, or upcoming Legislative changes – stay tuned.

Quick Fun Fact – Connecticut is the only state with both an Estate Tax and Gift tax.

Questions? Ask a WG Advisor