What’s the difference between estate tax and gift tax?

The estate and gift tax are often conflated, but there’s a big difference — and it’s important to note that California does not have an estate or gift tax. This is federal only (for Californians!)

Estate Tax

The estate tax is the tax paid by the estate of someone who died. (This is sometimes called a death tax.) It is not paid by the people who receive; it’s paid by the estate.

The current estate tax exemption is $12.92 million per person. Meaning, the estate (or, person who died) must have more than $12.92 million when they died in order to pay any estate tax. If married, it's double this because of portability. So a married couple would have to have more than (essentially) $25.84 million. That number is adjusted every year for inflation. 

In 2026, if Congress doesn't do something, that number will drop to be about half. (So still about $12M for a married couple). Since its impossible to predict what Congress will do, we are just keeping an eye on that number and what’s happening.

Gift Tax

The gift tax is paid while you’re alive. It is “paid” by the gift giver, not the gift receiver.

“Paid” is in quotes because of the following: Every year you can gift a certain amount of money to any other person without reporting to the IRS. This year it's $17,000 per person, or $34,000 for a married couple. Meaning, a married couple can give me $34,000 without reporting it to the IRS. 

If the couple gave me $35,000, then the gifter need to report that extra $1,000 to the IRS. The IRS doesn't tax them on it during their life times. The IRS deducts it from the estate tax exemption amount. Meaning, instead of $12.92 million, you would have an estate tax exemption of $12.92 million MINUS $1,000.

Taxes can be extremely complicated, and it’s important to consult with a CPA for any specific tax issues you’re facing. This is only a summary of how the estate and gift tax can be applicable to your estate plan. Contact me to discuss your own situation.