Gift tax is calculated by taking the face value of a taxable gift, less the annual exclusion and lifetime exemption amounts, multiplied by the applicable gift tax rate. Any gift received over the annual exclusion amount requires a taxpayer to file a Form 709.
Whether gift tax is due depends on a taxpayer's remaining lifetime exemption amount. The lifetime exemption changes year to year based on inflation and the current version of the tax code. For the 2014 tax year, the lifetime exemption, which applies jointly to both taxable gifts and estates, was $5,340,000. If a taxpayer gives a gift of $5,014,000 in 2014, he can choose to use his lifetime exemption for the amount of the gift over the 2014 annual exclusion of $14,000. This leaves $340,000 of his lifetime exemption remaining that he can apply to any taxable estate at the time of his death. In this example, no gift tax would be due. If the taxable gift exceeded the amount of the lifetime exemption, this amount would be subject to the gift tax. In 2014, the top tax rate was 40%. When any taxable gifts are made, a Form 709 must be filed even if the lifetime exemption is used.