The gift tax on a taxable gift of $2,000,000 is $675,000. This calculation is based on a progressive tax rate system, where different portions of the gift are taxed at increasing rates.
Understanding Gift Tax Rates
Gift tax is applied to amounts gifted over the annual exclusion limit (which is $18,000 per recipient for 2024, or $17,000 for 2023) and, for very large gifts, after considering the lifetime gift and estate tax exemption (which is $13.61 million for 2024, or $12.92 million for 2023). The question implies that $2,000,000 is the taxable gift amount, meaning it's the portion subject to these specific tax rates.
The gift tax rates used for this calculation are as follows:
| Taxable Gift Amount | Gift Tax Rate |
|---|---|
| $250,001 to $500,000 | 34% |
| $500,001 to $750,000 | 37% |
| $750,001 to $1,000,000 | 39% |
| $1,000,000 and over | 40% |
Note: This table represents specific marginal rates for certain taxable gift amounts. For amounts below $250,001, a specific rate is not provided in this excerpt, implying that the calculation for these rates begins once the taxable gift exceeds $250,000.
Calculating the Gift Tax on $2,000,000
To calculate the exact gift tax on a $2,000,000 taxable gift, we apply the progressive rates to each portion of the gift that falls within the respective brackets:
-
First Bracket ($250,001 to $500,000):
- Amount in this bracket: $500,000 - $250,000 = $250,000
- Tax on this portion: $250,000 * 0.34 = $85,000
-
Second Bracket ($500,001 to $750,000):
- Amount in this bracket: $750,000 - $500,000 = $250,000
- Tax on this portion: $250,000 * 0.37 = $92,500
-
Third Bracket ($750,001 to $1,000,000):
- Amount in this bracket: $1,000,000 - $750,000 = $250,000
- Tax on this portion: $250,000 * 0.39 = $97,500
-
Fourth Bracket ($1,000,001 to $2,000,000):
- This is the portion of the gift that falls into the "over $1,000,000" category.
- Amount in this bracket: $2,000,000 - $1,000,000 = $1,000,000
- Tax on this portion: $1,000,000 * 0.40 = $400,000
Total Gift Tax Calculation
Summing the tax from each applicable bracket provides the total gift tax:
- $85,000 (from $250,001-$500,000)
- $92,500 (from $500,001-$750,000)
- $97,500 (from $750,001-$1,000,000)
- $400,000 (from $1,000,001-$2,000,000)
- Total Gift Tax: $675,000
Important Considerations for Gift Tax
- Annual Exclusion: Individuals can gift a certain amount each year, tax-free, to any number of recipients. For 2024, this is $18,000 per recipient.
- Unified Credit/Lifetime Exemption: The gift tax and estate tax are "unified," meaning there's a single lifetime exemption amount that can be used against taxable gifts made during life or against the value of an estate at death. For 2024, this exemption is $13.61 million. This means that for most individuals, large gifts may not result in immediate out-of-pocket tax payments until the cumulative taxable gifts (and eventual estate value) exceed this lifetime exemption amount.
- Gift Splitting: Married couples can elect to "split" gifts, effectively doubling the annual exclusion per recipient.
- Educational and Medical Expenses: Payments made directly to an educational institution for tuition or to a medical provider for medical care are generally exempt from gift tax.
For more detailed information or to calculate specific scenarios, you can refer to resources like the TaxAct blog on gift tax or consult a tax professional.
