A gift tax is a tax imposed on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.
The United States government imposes a gift tax on gifts of money and other property that exceed the annual gift tax limit of $18,000 in 2024 .
The gift tax is intended to discourage large gifts that could potentially be used to avoid estate taxes.
The tax is based on the value of the gift. The person who made the gift is responsible for paying the gift tax, not the person receiving the gift.
There are some gifts that do not have to be taxed, like gifts given to a spouse or charity and tuition payments that are made to an educational institution. It is essential to know about gift taxes to avoid paying unexpected taxes on gifts given to loved ones.
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I'm Taylor Kovar, a Certified Financial Planner (CFP), specializing in helping business owners with strategic financial planning.
One of the things we see happy clients do is to give money away while they are living instead of when they die. They get to actually see the joy on the person's face and see how it is impacting them right now instead at some future time. You can give up to $18,000 in 2024 without having to complete any tax paperwork and you are able to give up to $13.61 million in your lifetime without anyone owing any taxes!
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Get in touchA gift is anything of significant value that a person gives to someone else without receiving anything equivalent to its fair market value in return.
This can be huge amounts of money, assets, or properties. It can also actually be small things like a piece of jewelry.
As an example, if you paid $500 for a piece of jewelry and gave it to your best friend, that is considered a gift. If you give properties to relatives, this is also considered a gift.
Forgiving a loan is also considered a gift. So, if you lent your friend $5,000 and he is unable to repay it, you can simply forgive the debt and this would be considered a gift.
However, keep in mind that the gift tax will only be imposed on gifts that are valued at more than $18,000 per person in a year. So, if you give your friend a gift that is worth less than $18,000, you will not have to pay any gift taxes.
Generally, any gift is a taxable gift. But numerous exceptions apply to this rule, which will be discussed below.
Gifts with value that does not exceed the set annual limit receive tax exemption. This means that if the amount of the gift you give does not go over the limit, then you are not required to pay tax for it.
An individual is not required to pay gift tax for paying someone's school tuition provided that payments are directly received by educational institutions.
You need not worry about paying any gift tax on charitable donations. This exemption is a great way to support charities and get a tax break at the same time.
Medical expenses are one of the many types of gifts that are exempt from the gift tax given that these are directly paid to medical service providers. This exemption is great for people who want to help out their loved ones during difficult times.
Political contributions are exempt from the gift tax for as long as the donations are directly transferred to the candidates or political organizations. This exemption is a good avenue to support their causes.
One of the most common exemptions from the gift tax is the exemption for gifts to spouses and dependents. This means that you can give your spouse or dependent any amount of money or assets without having to pay any gift tax.
However, it must be noted that a gift limit of $185,000 (for 2024) annually is enforced for a spouse who is not a U.S. citizen. Anything beyond this amount is subject to taxes.
The annual gift tax limit is $18,000 per person in 2024 . This means that you can give up to $18,000 to anyone without having to worry about paying any gift tax. You need not be concerned about taxes on gifts that are equal to or less than the annual exclusion limit.
As an example, a parent who has two children can give each of them $18,000 for a total of $36,000 without having to pay any gift tax. Remember that the limit is per recipient, not per donor.
The gift tax limit for couples allows spouses to share their annual gift tax exclusion. This suggests that a husband and wife can give a total of $36,000 without having to pay any gift tax.
Using our previous example, a couple can give $36,000 to each of their two children without any gift tax consequences.
In actuality, a majority of taxpayers will never have to pay gift tax because the IRS stipulates that an individual can gift a total amount of $13.61 million, as of 2024, over their entire life without being burdened by any tax.
Let us consider, you gift a property worth $350,000 to a relative. This of course goes beyond the annual gift tax limit. This prompts you to report to the IRS. Take note, you will not be paying any tax yet.
The IRS actually just deducts the amount which went over the annual tax limit, in this case, $332,000 ($350,000- $18,000 ), from the lifetime gift tax limitation of $13.61 million.
If you do not make any other gift that exceeds the annual gift tax limit, you will still have a lifetime exemption of $12.729 million. This is the resulting amount after deducting $332,000 from $13.61 million.
When calculating gift tax, you will need to know the gift value that exceeded the annual exclusion limit to determine the corresponding rate which ranges from 18% to 40%.
Keep in mind that you do not have to pay these gift taxes until your lifetime exemption is depleted.
For example, if someone has used up all their lifetime gift tax exemption, and wishes to give a gift worth $20,000, the taxable value would be the amount that exceeded the annual $18,000 exemption limit, which is $2,000 .
Using the rates on the table, the excess $2,000 would be taxed at 18%. Therefore, a $360 tax would be owed by the donor.
Taxable Amount = Value of the Gift - Annual Gift Tax Limit
Gift Tax Due = Taxable Amount x Applicable Rate
In another case, let us say the value of the gift is $31,000. This means that the taxable amount is $13,000 which is the amount in excess of the annual limit.
The first $10,000 of the total taxable amount will be charged at 18% and the remaining $3,000 at 20%. This gives us a total gift tax amount of $2,400.
Taxable Amount = Value of the Gift - Annual Gift Tax Limit
Gift Tax Due = (Taxable Amount x Applicable Rate) + (Taxable Amount x Applicable Rate)
= ($10,000 x 18%) + ($3,000 x 20%)
If you have made taxable gifts in a given year, then you will have to file a gift tax return. The due date for the filing of this return is typically on April 15 of the following year.
Accomplish the IRS Form 709 , United States Gift (and Generation-Skipping Transfer) Tax Return, before the deadline. Make sure to fill in the appropriate details and do not forget to include your signature and date at the bottom.
Send the completed form with the rest of your tax return.
Take note that Form 709 should be filed anytime you give something that exceeds $18,000 – even if you are still covered by the $13.61 million lifetime limit.
Dealing with gift taxes is often expensive and inconvenient. If possible, it is best to avoid it with the following tips.
Give gifts that fall below the annual exclusion limit to save worries from paying gift tax. This means that as long as you do not give anything beyond the limit for exemption and you do not use up your lifetime gift tax limit, you can be free from being burdened by the gift tax.
Structure your gifts in a way that you make multiple gifts over a period of time. If you break up the gift into smaller amounts, it will be easier to stay within the annual exclusion limit and you will not have to file a gift tax return.
Gift splitting allows married couples to double the annual gift tax exclusion limit and enhance the advantages of gifting without worrying about taxes. By splitting the gift between them, they can avoid incurring any gift tax.
The gift tax exclusion rule does not usually cover funds allocated by trusts. A special type of trust, such as the Crummey trust, allows donors to give gifts free of tax even while exceeding the annual exemption limit.
This arrangement allows the beneficiary to withdraw within a fixed time period and is referred to by the IRS as a present interest which is considered a nontaxable gift.
Gift taxes are federal taxes imposed on the transfer of property, money, or assets from one person to another. Although a huge portion of Americans will never face this tax, understanding the process is still very crucial.
There are numerous exemptions to the gift tax. One of the most important things to remember is that, as long as you do not gift more than $18,000 per year and you have not accumulated giving a total of $13.61 million in your lifetime as of 2024, chances are you do not have to worry about gift taxes.
Knowing what steps to take after exceeding the exemption limit is beneficial. Moreso, it is essential to know how to avoid incurring taxes on the gifts you give such as staying within the limit, planning gifts, gift splitting, and using trust funds.
It is the civil obligation of the donor to file a gift tax return if they gift something that goes beyond the annual exemption limit of $18,000 and must be reported using Form 709. Ignoring this responsibility can result in penalties when you get audited by the IRS.
Generally speaking for the year 2024, it is safe to give up to $18,000 per person without incurring any gift tax. You can also consider the remaining amount you can give based on your lifetime gift tax exemption limit.
The tax rate depends on the marginal tax bracket that the donor falls into for the year. The marginal tax bracket will be determined by the total taxable gift amount incurred in that year. The rate ranges from 18% to 40%.
Stay within the annual exclusion limit of $18,000, and take advantage of your lifetime exemption of $13.61 million for 2024. When applicable, split gifts with your spouse, give smaller gifts over time to avoid the annual limit, and lastly, consider creating a trust fund.
If you do not file a gift tax return when you have gifted something that exceeds the annual exclusion limit, the IRS can penalize you. You may be charged a penalty for each year that the gift tax return is late, and you could also face interest on the unpaid taxes.
About the Author
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
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