Gift Tax: How Much Is It and Who Pays It?
There are few better feelings in life than giving the perfect gift to a loved one. And while giving gifts to family and friends certainly has its benefits, you may face some unintended financial consequences in the process.
The federal government imposes a gift tax of up to 40% on transfers of property from one person to another, whether in cash or a physical item. If your donation exceeds a certain amount, you will need to file a gift tax return and pay gift tax.
What is the gift tax?
Gift tax is a tax that people must pay when they transfer a donation to another person. The IRS defines a gift as a transfer of property from one individual to another, where the donor does not receive payment at full market value.
The gift can be money, but it can also be other assets like stocks or real estate.
The gift tax was first enacted in 1924, temporarily repealed in 1926, and re-enacted in 1932. It was designed as a way to prevent wealthy families from avoiding property taxes by transferring wealth to their children during their life. life.
Who pays the gift tax?
Generally, you don't have to worry about paying taxes on gifts you receive from loved ones. It is the donor, not the recipient, who will file a gift tax return (Form 709) and possibly pay gift tax.
Special arrangements can be made when the recipient of the donation can agree to pay the gift tax in lieu of the donor. If you are interested in this arrangement, the IRS recommends speaking with a tax professional for advice.
In most cases, it's pretty clear when a gift is made, as long as you transfer something of value from one person to another. But there are some situations where someone may be transferring a gift without actually thinking of it as a gift.
For example, if you are giving your child a gift, this is a taxable change. The only person to whom you can give a gift without potential tax consequences is her spouse.
Something can also be considered a gift, even if there is a partial payment made by the recipient. Suppose a couple decides to sell the house to their adult son for a price of $ 250,000, but the fair market value of the house is actually $ 500,000.
Even if the child has paid, the $ 250,000 difference between the purchase price and the market value is considered a gift.
The good news is that there are many gifts that will not be subject to gift tax. These gifts include:
Tuition or medical expenses paid on behalf of someone else
Gifts for your spouse
Gifts for a political organization
Gifts for a charity
Annual exclusions and life limits
Thanks to lifetime and annual exclusions, most people will never end up paying gift tax, and many will not have to file gift tax returns for property they transfer to a third party.
The Annual Exclusion
For fiscal years 2020 and 2021, the annual exclusion is $ 15,000. Individuals will not be required to file a gift tax return until they donate at least that amount to another individual in a tax year.
For example, if you gifted someone $ 20,000, you will need to file a gift tax return for $ 5,000, which is the amount above the annual exclusion.
Note that the annual exclusion applies to each individual, which means that you can donate significantly more than $ 15,000 per year as long as it is given to multiple people or organizations.
It also means that a couple can give another person up to $ 30,000 before filing a gift tax return, since technically each spouse can give up to $ 15,000.
The annual gift tax exclusion was indexed to inflation as part of the Tax Relief Act of 1997. To keep pace with the economy, the amount can increase from year to year, but only in increments of $ 1,000.
Exclusion was stable for several years, increasing in 2002, 2006, 2009, 2013 and 2018.
Exclusion for life
Filing a gift tax return does not mean that you will actually end up paying gift tax, as the IRS also has a lifetime exclusion for the total amount someone can donate during their lifetime before paying gift tax.
$ 11.58 million for fiscal year 2020 and $ 11.7 million for fiscal year 2021.
For example, if you gifted someone $ 20,000, you'd have to file a gift tax return for $ 5,000, the amount above the annual exclusion, but that $ 5,000 would also count toward your exclusion for life, so if You haven't used them, yet you must. You may not have to pay taxes on that money yet.
Large gifts transferred during your lifetime can also have tax implications after your death. Property that exceeds a certain value is subject to property tax before it can be transferred to the beneficiaries.
But the gift tax exclusion and the property tax exclusion are intertwined.
The $ 11.7 million lifetime exclusion for tax year 2021 applies to your gift and real estate taxes. Any gift you transfer during your lifetime that counts against your lifetime exclusion also lowers the limit on when your property may be subject to real estate tax.
Let's look at an example. Suppose that, in your lifetime, you donate $ 3 million in addition to your annual exclusions. That money counts against his lifetime exclusion of $ 11.7 million. When you die in 2021, you'll have $ 8.7 million left from your lifetime exclusion, and any property in excess of that amount will be subject to property taxes.
We hope you enjoy watching this video about Gift Tax
Source: Czepiga Daly Pope & Perri LLC
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