There was lots of talk last year about possible changes to the federal estate tax. But there is another federal transfer tax that you should be aware of – the federal gift tax. The federal gift tax is a tax that individuals may need to pay when they transfer an asset to another person – directly or indirectly (i.e., in trust) – without sufficient payment in return. If you made gifts in 2021, you may have to file a federal gift tax return by April 18, 2022.

Here are some facts you may find interesting about the federal gift tax.

1. The gift tax rate is high, but few individuals actually pay gift tax. The federal gift tax rate is 40%. But most taxable gifts don’t actually generate a gift tax paid to the IRS. This is because the IRS allows you to gift up to $12,060,000 (the federal exemption amount) during your lifetime without paying any gift tax. The hitch is that this exemption is “unified” with the federal estate tax exemption, so that gifts during your lifetime reduce the exemption available at your death to protect assets from estate tax.

2. Even if no gift tax is due, you may still need to file a gift tax return. The IRS requires you to file a gift tax return if you made taxable gifts, regardless of whether you actually owe gift taxes.

3. Not all gifts are taxable. The IRS allows you to make unlimited gifts to your spouse (provided he or she is a US citizen). The IRS also allows you to make gifts up to $16,000 per year to anyone. This amount is called the “Annual Exclusion”. The IRS also allows you to pay unlimited tuition or medical expenses for anyone, but the expenses must be paid directly. This is sometimes called the “Med-Ed Exclusion”.

4. Gifting during your lifetime may save estate taxes at your death. If you make gifts during your lifetime – annual exclusion gifts, med/ed gifts, or taxable gifts – you will likely reduce the overall estate taxes due after your death. For this reason, if you can afford it, lifetime gifting is often a good estate tax planning strategy.

5. If you are married, you have the option to “split” taxable gifts with your spouse. You and your spouse together can gift $32,000 (2x the annual exclusion amount) per year to anyone. Even if the entire gift is transferred by you, if you are married, the IRS will treat the gift as if it came ½ from you and ½ from your spouse, provided your spouse consents to split the gift on a gift tax return.

6. There is no Massachusetts gift tax. Massachusetts has an estate tax, but not a gift tax. So if you live in Massachusetts, you don’t have to worry about filing a state gift tax return. This means that gifting can be a great strategy to reduce Massachusetts estate taxes due after your death.