Perhaps you are fortunate enough financially to give away substantial amounts of money or property during your lifetime, or you’re not extremely wealthy, but still feel generous and want to make a substantial gift to a loved one. Knowing the federal gift tax rules will help make sure that your generosity doesn’t cost you more.
First, lets define it: What is a gift tax?
A gift tax is a federal tax on the transfer of property (including money), by one individual to another while receiving nothing, or less than full value, in return.
This is a topic that can cause some confusion. Some of the confusion stems from the fact that there are two "exclusions" or "exemptions" that apply to federal gift taxes. They are as follows:
(1) The annual gift tax exclusion: The total amount that can be given away by and individual annually that will be free from gift taxes.
(2) The lifetime gift tax exemption: The total amount that can be given away by an individual over his or her entire lifetime to any number of people that will be free from gift taxes.
What are the gift tax rules for each in 2015?
* For the current gift planning limits, please refer to the article “What are the Gift Planning Limits for 2019”.
The annual individual gift tax exclusion is $14,000, or $28,000 per married couple (no increase from 2014)
The lifetime gift tax is indexed to inflation. It currently is at $5.43 million (increased from $5.34 million in 2014)
What Happens If You Make A Taxable Gift?
Here is an example: If during the course of 2015 you make a total of $20,000 in gifts to your daughter. You will have made a taxable gift to your daughter equal to $6,000:
$20,000 in gifts reduced by the $14,000 annual gift exclusion is $6,000 in taxable gifts. In turn, the $6,000 in taxable gifts will reduce your 2015 $5,430,000 lifetime gift tax exemption down to $5,424,000.
What happens if a married couple makes a taxable gift?
You can give away $14,000 to as many individuals as you’d like per year. A husband and wife can each make $14,000 gifts. So a couple could make $14,000 gifts to each of their four grandchildren, for a total of $112,000. The annual exclusion gifts don’t count towards the lifetime gift exemption.
Taxable gifts must be reported to the IRS on Form 709, United states Gift (and Generation-Skipping Transfer) Tax Return. The return is due on the same date as your personal income tax return, meaning on April 15 of the year after the year in which the taxable gifts are made.
The Estate Tax is a tax on the transfer of the estate of a deceased. It is an accounting of everything you own or have certain interests in at the date of death. Your estate tax exemption will be equal to your total remaining unused lifetime gift tax exemption. Make sure you keep track of any gifts you make during your lifetime as they also count against the eventual estate tax exemption that is available at the time of your death.
What can be excluded from gift tax?
Generally, the following gifts are not taxable gifts.
Charitable gifts.
Gifts to a spouse.
Gifts to a political organization for its use.
Gifts of educational expenses. These are unlimited as long as you make a direct payment to the educational institution for tuition only. Books, supplies and living expenses do not qualify.
Gifts of medical expenses. These, too, are unlimited as long as they are paid directly to the medical facility.
Who pays the gift tax?
It is the giver of the gift (“donor”) who is required to pay the gift tax. The receiver of the gift (“donee”) may pay the gift tax, or a percentage of it, on the giver's behalf in the event that the giver has exceeded his/her annual personal gift tax deduction limit.
What happens if you exceed the limits of your lifetime gift tax exemption?
If you give away more than the $5.43 million per-person lifetime gift tax exclusion, you could wind up owing gift & estate tax of up to 40%. Even if you don’t exceed the limits, your lifetime gifts would reduce how much you can pass tax-free through your estate plan.
Understanding the federal gift tax regulations can create opportunities to transfer assets during your lifetime and help your estate-tax bottom line. This can mean exercising your generosity and saving taxes at the same time.
Carol Chaudet
(last updated 01/17/2019)