This Month's Top Tax FAQs
Question #1 – What is the difference between the U.S. estate tax and U.S. gift tax?
Answer – The estate tax is a tax at the highest individual rate (currently 37%) on any transfer of property by your estate after you have passed away. The gift tax is a tax at the highest individual rate on any transfer of property during your lifetime to an individual without compensation in return. Each tax has its own particular nuances and exceptions as well as its own reporting requirements.
Expats should be aware of the particular filing requirement that applies to certain gifts from foreign persons (for instance, a gift of more than $100,000 from a nonresident alien individual).
Question #2 – What is the relationship between the two taxes?
Answer – The gift tax essentially acts as a backstop to the estate tax. Therefore, they both share the so-called “lifetime exemption.” This means you can transfer property by gift or by bequest at death up to a certain amount without paying the gift or estate tax. Gifts made during your lifetime reduce the lifetime exemption amount available to you when you pass away.
Question #3 – What is the current lifetime exemption amount?
Answer – Trump’s tax reform doubled the lifetime exemption to $11.2 million in 2018 (which can be further doubled for married couples). The amount is subject to annual inflation.
The lifetime exemption amount currently stands at $11.58 million in 2020.
Question #4 – Are there gifts that do not count towards the lifetime exemption, such as gifts to a spouse?
Answer – Yes, gifts up to certain amounts do not count towards the lifetime exemption. First, there is an annual general exclusion amount that does not count towards the lifetime exemption. The annual exclusion amount is $15,000 in 2020.
Second, there is an annual spousal exclusion amount that does not count towards the lifetime exemption. You can make a gift to your spouse, including to your nonresident alien spouse, up to the amount of $157,000 in 2020.
If your gifts are below either of these exclusion amounts, you also do not have to report the gifts on your U.S. tax return.
Question #5 – Will the results of the U.S. Presidential election affect the U.S. estate and gift tax regimes?
Answer – Under current law, the increase in the lifetime exemption under Trump's tax reform is set to expire at the end of 2025. A Biden presidency may change the current law, such that the lifetime exemption reverts back to half the current amount sooner than 2025. Further, since the estate tax is a tax at the highest individual rate, the estate tax rate would increase if the highest individual rate increases.
A Biden tax reform would require approval in Congress, so it remains to be seen if and when a significant change takes place. We will continue to monitor this and other changes that are expected to be pushed under Biden's tax agenda.