Transfer Tax

A transfer tax, in the broadest sense, is any tax on the transfer of goods or property between two legal entities. By this definition a sales tax, real estate tax or capital gains tax qualify. In most cases the term transfer tax is used to describe an estate or gift tax.
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The federal estate tax in the US is imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. In other words after the passing of an individual, their property value is calculated and taxed before being passed on to the heirs.Transfertax

The tax assessed is based on a formula determined by the IRS. The process begins by evaluating what is known as the “gross estate”. This includes more than what will eventually be taxed. It includes all property owned by the decedent at the time of death. It also includes other categories. Some property owned by the surviving spouse may be included. Also the value of certain property transferred to others during the three years previous to the date of death. Several other less common items may be included as well.

After determining the “gross estate” IRS laws allow for several deductions to be taken before arriving at the “taxable estate”. Deductions of this kind may include, but are not limited to funeral expenses, some charitable contributions, or items left to the surviving spouse.

The “taxable estate” is then the point at which we begin to calculate the amount of the tax levied before the passing on of the estate to the heirs. The next factor to consider is the tax exclusion amount. This amount is a value set by the IRS for which there is no tax unless the estate is worth more than that value. In 2015 the estate tax exclusion amount was raised to $5.43 million dollars. This means if the value of the estate is below $5.43 million, there will be no tax on the estate.

One caveat on the exclusion is the unified estate and gift tax system in the United States. When you give taxable gifts during your lifetime, those amounts will count against your tax exclusion amount. Meaning you could potentially use up your $5.43 million exclusion based on your taxable giving during your life. More on taxable gifts later.

If your estate exceeds the exclusion amount or the reduced exclusion amount after taxable gifts are considered, the amount over the exclusion amount is subject to a %40 tax. Careful planning and advance giving can help reduce the burden to be placed on heirs.

As mentioned before, transfer taxes can also be assessed on gifts. Any gift over $14,000 will be subject to a gift tax. As mentioned before, any taxable gift amount will offset the exclusion amount for the estate. Certain categories of gifts can be given with no tax issues. Charitable gifts, gifts to a political organization, gifts to pay educational expenses or gifts to pay medical expenses are excluded from taxes.

Please consult a licensed tax professional regarding your specific tax situation.