In certain situations, gift-giving and estate taxes can be related. We've previously discussed that you don't have to worry about the hefty federal estate tax as long as your estate is worth less than the threshold amount when you pass away. As of 2016, that amount was $5.45 million.
You can inadvertently reduce that threshold if you are especially charitable with your wealth throughout your lifetime. You're allowed to give a certain amount of your wealth to individuals each year without incurring what is called the gift tax -- this is a tax you pay, not one that the gift recipient pays.
The exclusion amount changes occasionally to reflect inflation, but in 2015 and 2016, it was $14,000 per individual per year. That means that you could gift someone up to $14,000 each calendar year without paying a gift tax. It also means that you could give the same amount to as many people as you liked without incurring the tax as long as each person received no more than $14,000.
The gifts are also collective. If you presented one person with cash gifts of $7,000 three times in one year, the total would be $21,000, which is $7,000 more than the allowed exemption.
Each time you go over the exclusion, it accumulates against your overall estate tax threshold. If you gave someone $20,000 every year for 10 years, you might have accrued $60,000 in amounts over the exemption. That means if your estate is valued more than $4.85 million ($5.45 million minus $60,000) when you pass away, it will owe some taxes. To avoid such issues, talk to your estate planning lawyer before gifting large portions of cash this holiday season.
Source: TurboTax, "The Gift Tax Made Simple," accessed Dec. 16, 2016