Now we know there are a lot of things to worry about in life, but the gift tax probably shouldn’t be one of them. Here are some common questions that I are asked and the answers should shed some light.
What is the gift tax?
The gift tax is a tax on the transfer of money or property to another person while getting nothing (or less than full value) in return. Many people don’t get hit with the gift tax, because the IRS generally doesn’t care about what you give away to other people unless that giving exceeds some lofty amounts. And even if it does, it might mean you just have to fill out some paperwork.
How much can you gift?
Two things keep the IRS’ hands out of most people’s candy dish: the $15,000 annual exclusion in 2018 and 2019, and the $11.2 million lifetime exclusion (in 2018). In 2019, the lifetime exclusion rises to $11.4 million. Stay below those and you can be generous under the radar. Go above, and you’ll have to fill out a gift tax form when filing returns — but you still might avoid having to pay any gift tax.
How does the annual gift tax exclusion works?
In 2018 and 2019, 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 does the lifetime gift tax exclusion works?
On top of the $15,000 annual exclusion, you get a $11.2 million lifetime exclusion (in 2019, that rises to $11.4 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 where 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 $11.2 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. What the gift tax return does is it 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. The IRS generally doesn’t care about what you give away to other people unless
that giving exceeds some lofty amounts. And even if it does, it might mean you just have to fill out some paperwork.
What is the gift tax rate?
If you’re lucky enough and generous enough to use up your exclusions, you may indeed have to pay the gift tax. The rates range from 18% to 40%, and the giver generally pays the tax. There are, of course, exceptions and special rules for calculating the tax, so see the instructions to IRS Form 709 for all the details.
What can trigger a gift tax return?
Caring is sharing, but some situations often inadvertently trigger the need to file a gift tax return, pros say.
· Spoiling the grandkids with college money
Let’s say Grandma and Grandpa say, “We don’t really like your husband and we don’t really like you, but we really like our grandkids. So, we’re going to give $60,000 and we’re going to put it in a 529 plan for them so their college is paid for.” Well, Grandma and Grandpa just triggered the gift tax exclusion because it’s over [$15,000].” 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.
· Springing for vacations, cars or other stuff
If you fork out $40,000 for Junior’s wedding, or just pay for the crazy-expensive honeymoon, get ready to do some paperwork. Those kinds of things are actually gifts that people normally wouldn’t even think about. If you’re paying tuition or medical bills, paying the school or hospital directly can help avoid the gift tax return requirement (see the instructions to IRS Form 709 for details).
· Laid-back loans
Lending money to friends and family is usually a bad idea, and the IRS can make it even worse. It considers interest-free loans as gifts. Or if you give them a loan and later decide they don’t need to repay the loan to you, that’s also making gifts.
· Elbowing in on a non-spouse bank account
Let’s say you live by Grandma, so for convenience, we’re going to put you on Grandma’s bank account. Guess what just happened? If you’re put as a joint [owner] on a bank account with somebody and you have the right to take the money out at any time, essentially Grandma is giving you a gift.
Why do some big gifts still might not trigger gift tax?
If all your gifts are under $15,000 for the year, then you’re all set. But even if you make bigger gifts, you still might not owe any gift tax. There are two reasons why. First, there are some gifts that you’re allowed to make tax-free in larger or even unlimited amounts, including:
¨ Gifts to spouses who are U.S. citizens
¨ Gifts to charity
¨ Gifts for tuition and qualified educational expenses that you make directly to the educational institution
¨ Gifts to cover medical expenses for someone else that you make directly to the provider of the medical services
Note that for gifts related to educational or medical purposes, it’s critical for you to make the gift directly to the institution in question. If you give it to the student or patient first, then it doesn’t qualify for the exclusion and can get treated as a taxable gift. In addition, even if your gifts don’t qualify for any of those exemptions, you’re also entitled to a lifetime exemption from gift and estate tax. In 2020, that exemption amount jumps to $11.58 million.
Make gifts worry-free
Many people are scared of the gift tax when they’re doing their tax planning, but it really affects very few people. With a $15,000 annual exclusion continuing for 2020, gifts won’t be a tax problem for the vast majority of Americans in the coming year.