Gift Tax

The Gift Tax

There are a lot of things to worry about in life, but the gift tax probably isn’t one of them.

The gift tax is a federal tax applied to transfers or “gifts” of money to other people while getting nothing or less than the full value in return. Unless the gift tax exceeds $15,000 the IRS generally is not involved. In most cases even when the IRS does intervene, it only involves some extra paperwork.

The gift tax rates range from 18% to 40%, and the giver usually pays the tax. There are special rules and exceptions for calculating the tax, so be sure to see the instructions to IRS form 709 for details. If you’re fortunate enough to use up your exclusions, you will want to know your own personal rate. 

How to avoid gift tax

Staying below these two limits usually keeps the IRS out of your hair:

  1. The $15,000 annual exclusion in 2020 and 2021
  2. The $11.58 million lifetime exclusion in 2020 ($11 Million in 2021).

When you go above either of these, you’ll need to fill out a gift tax form when filing returns. Even then, you still may not have to pay any gift tax. 

If You receive a Gift, Do you pay taxes?

In most cases, no. Typically, what you receive as a gift or inheritance is not taxable income. Only if the assets produce income later on, is the income likely taxable. However, if later on the assets produce income by earning interest or dividends, or rent is collected on them, that income is most likely able to be taxed. Please note that some states do have inheritance taxes as well. 

What are some things that trigger a gift tax?

  • Weddings, Vacations and Cars
    • If you donate a chunk of dough for your beloved daughter’s wedding or honeymoon, you can expect some paperwork to be sent your way.
    • If you’re paying medical bills or tuition, you can avoid the tax by paying the school or hospital directly instead of the recepient 
    •  
  • College Money for the Grandkids
    • Even when putting money in a 529 plan for the next generation, the gift tax still applies. A special rule allows gift givers to spread one-time gifts across five years’ worth of gift tax returns to preserve their lifetime gift exclusion.
  • Loan For a Friend
    • It’s always iffy loaning money to friends and even family, but what makes it worse is the IRS considers interest-free loans as gifts. A loan that you later decide need not be repaid is also considered a gift.

.How gift tax is calculated and how the annual gift tax exclusion works 

(according to nerdwallet.com)

  • In 2020 and 2021, you can give up to $15,000 to someone in a year and generally not have to deal with the IRS about it.
  • If you give more than $15,000 in cash or assets (for example, stocks, land, a new car) in a year to any one person, you need to file a gift tax return. That doesn’t mean you have to pay a gift tax. It just means you need to file IRS Form 709 to disclose the gift.
  • The annual exclusion is per recipient; it isn’t the sum total of all your gifts. That means, for example, that you can give $15,000 to your cousin, another $15,000 to a friend, another $15,000 to the neighbor, and so on all in the same year without having to file a gift tax return.
  • The annual exclusion also is per person, which means that if you’re married, you and your spouse could give away a combined $30,000 a year to whomever without having to file a gift tax return.
  • Gifts between spouses are unlimited and generally don’t trigger a gift tax return. Gifts to nonprofits are charitable donations, not gifts.
  • The person receiving the gift usually doesn’t need to report the gift.

How the lifetime gift tax exclusion works

  • On top of the $15,000 annual exclusion, you get an $11.58 million lifetime exclusion (in 2021, that rises to $11.7 million). And because it’s per person, married couples can exclude double that in lifetime gifts. That comes in handy when you’re giving away more than $15,000.
  • “Think about buckets or cups,” says Christopher Picciurro, a certified public accountant and co-founder of accounting and advisory firm Integrated Financial Group in Michigan. Any excess “spills over” into the lifetime exclusion bucket.
  • For example, if you give your brother $50,000 this year, you’ll use up your $15,000 annual exclusion. The bad news is that you’ll need to file a gift tax return, but the good news is that you probably won’t pay a gift tax. Why? Because the extra $35,000 ($50,000 – $15,000) simply counts against your $11.58 million lifetime exclusion. Next year, if you give your brother another $50,000, the same thing happens: you use up your $15,000 annual exclusion and whittle away another $35,000 of your lifetime exclusion.
  • The gift tax return keeps track of that lifetime exemption. So if you don’t gift anything during your life, then you have your whole lifetime exemption to use against your estate when you die.

 

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