Gift-giving is a thoughtful way of showing appreciation, love, and gratitude to our family and friends. However, before you hand over a significant amount of money, property, or assets, it’s essential to understand the gift tax so you can avoid any pitfalls that may affect your finances. In this article, we’ll give you a Gift Tax 101 course to help you make the right decisions when giving out gifts to your loved ones.
What is Gift Tax?
Gift tax is a federal tax that applies to gifts of property or money that exceed a specific amount in a given year. The giver, rather than the recipient, is responsible for paying the tax. The Internal Revenue Service (IRS) defines a gift as any transfer in which full consideration (measured in money or money’s worth) is not received in return. If you give a gift to someone and receive something of equal value in return, this is not considered a gift under the tax law.
The Gift Tax Exclusion and Annual Exclusion
Every year, the IRS sets an exemption amount that allows a person to give away a certain amount of gifts without incurring any tax liability. For 2021, the annual gift tax exclusion is $15,000 per recipient. This means that you can give up to $15,000 to any person per year without incurring any gift tax liability. If you give a gift to more than one person, you can use the annual exclusion for each recipient separately.
For example, if you give your son $15,000 and your daughter $15,000, you can exclude $30,000 from your gift tax return. If you’re married, you and your spouse can combine your exclusion to give gifts of up to $30,000 per recipient, for a total of $60,000. This also applies to gifts given on behalf of both spouses.
Gift Tax Lifetime Exemption
If you exceed the annual exclusion limit of $15,000 per recipient, the excess amount will be counted towards your lifetime gift tax exemption. The lifetime gift tax exclusion is $11.7 million per individual for 2021. This means that you can give away up to $11.7 million during your lifetime without incurring a gift tax. However, keep in mind that this amount is combined with your estate tax exemption, which means that any gifts you make during your lifetime will reduce the amount of your estate tax exemption.
Reporting Gift Tax
If you exceed the annual exclusion limit of $15,000 per recipient, you need to file a gift tax return with the IRS. The gift tax return is due on April 15th of the year following the gift. The gift tax return is also used to track your lifetime gift tax exemption. If you’ve exceeded your annual exclusion limit, you can use your lifetime gift tax to cover the excess amount. However, if you’ve used up your lifetime gift tax exemption, you’ll have to pay gift tax on any excess amount.
Gift Giving Strategies
There are several gift-giving strategies you can use to make the most of your gift tax exclusion and minimize your gift tax liability. Some of these strategies include:
– Spousal Splitting: If you’re married, you and your spouse can split gifts to each other’s families. This means that you can give a gift of up to $30,000 to your spouse’s family without incurring any gift tax liability.
– Charitable Donations: Charitable donations are tax-deductible, which means that you can reduce your gift tax liability by making a charitable donation instead of a cash gift.
– Education and Medical Gifts: Gifts made directly to educational institutions or medical facilities for the benefit of someone else are also exempt from gift tax. This means that you can pay for someone’s education or medical expenses without incurring any gift tax liability.
Gift tax is a complex topic that requires careful consideration before making any significant financial gifts. Understanding the annual exclusion limit, lifetime exemption, and strategies for minimizing gift tax liability can help you make informed decisions when giving gifts to your loved ones. Consulting with a tax professional can also provide valuable insights and guidance on the most appropriate strategies for your circumstances.