Death and Taxes – Questions and Answers on Estate and Gift Taxes

Find out Whether your Loved Ones Will have to Pay the Tax Man

There is a lot of misunderstanding when it comes to estate and gift taxes.  Over the last few years, the law in New York State has changed significantly.  What follows are questions and answers on some of the most common issues regarding estate and gift taxes.

When I die, will I have to pay taxes on my estate?

Generally speaking, you will only have to pay taxes on your estate if the value of your estate is above the state and/or federal estate tax exemption amounts when you die.  The current exemption amount for New York estate taxes is $6,580,000 and the current exemption amount for federal estate taxes is $12,920,000.  Certain deductions, like charitable deductions, can reduce the size of your taxable estate.

If my spouse inherits my estate, do they have to pay estate taxes?

No.  There is an unlimited marital deduction for estate taxes. Generally speaking, no matter what amount of assets your spouse inherits from you, they do not have to pay estate taxes on them.  The problem comes when your spouse later passes away, all of their estate (their own assets plus whatever they inherited from you) will potentially be subject to estate tax.

What is portability?

The federal estate tax exemption of the first spouse to die can be “ported” to the surviving spouse.  This means that if your spouse dies in 2023 and the federal estate tax exemption amount is $12,920,000, your spouse’s unused $12,920,000 exemption can be carried over to your estate tax return when you later pass away.  If the federal estate tax exemption when you die is $14,000,000 then your total estate tax exemption when you die is $26,920,000 ($12,920,000 + $14,000,000).

To take advantage of this “portability”, the surviving spouse must file an estate tax return for the first spouse to die – even though there will be no tax payable at that time due to the unlimited marital deduction.  Portability of the estate tax exemption only applies to federal estate taxes – not New York estate taxes.

Are gifts taxable?

There are multiple exceptions that keep gifts from being taxable.  If your gift does not fit under one of the exceptions, then you must file a gift tax return – IRS Form 709 – and potentially pay gift taxes.

What are the exceptions to gift taxes?

Generally, a gift is not taxable if it is: a) made to your spouse, b) below the IRS annual exclusion amount, c) made to a charity, d) made to a political organization for its use, or e) paid directly to a medical or educational institution on someone’s behalf for qualified expenses.

What is the “IRS annual exclusion amount”?

The IRS annual exclusion amount represents a monetary value under which gifts can be made in a calendar year, without any applicable gift taxes.  In 2023, the amount is $17,000.  So in 2023, you can make a gift to someone of up to $17,000 without having to worry about gift taxes.

What if I give over the annual exclusion amount to someone?

If you give an amount over the annual exclusion amount, that excess amount needs to be reported on an IRS Form 709.  A gift tax is calculated on the amount over the annual exclusion, but you won’t have to pay a tax at that time, unless you’ve made taxable gifts over your lifetime in excess of the applicable limits.

Do the recipients of my gifts need to pay tax?

Generally speaking, the recipient of a gift does not have to pay gift tax or income tax because of the gift.  The recipient may have to pay income tax on any income generated by the gifted asset.

What is “gift splitting”?

You can “split” a gift by sharing the gift with your spouse.  For example, if you gift $30,000 to your child in 2023, that amount is over the $17,000 annual exclusion for 2023 and therefore gift taxes would potentially apply.  However, you can join with your spouse and “split” the gift into two gifts of $15,000 each, resulting in two gifts under the $17,000 annual exclusion for 2023.  That “split” means the gift is not taxable, however you do have to file a Form 709.

Navigating the intricacies of the state and federal tax codes can be challenging.  In order to minimize your tax burden and increase what you leave for your loved ones, you should consider contacting an experienced estate planning attorney or tax professional for advice.

Matthew J. Dorsey, Esq. is a Senior Partner with O’Connell and Aronowitz, 1 Court Street, Saratoga Springs, New York.  Over his twenty-six years of practice, he has focused on the areas of elder law, estate planning, and estate administration.  Mr. Dorsey can be reached at (518) 584-5205, mdorsey@oalaw.com and www.oalaw.com.