Clothing. A gold watch. A $100 gift certificate in a greeting card. These are some of the types of gifts that most of us give to others, and let’s face it – with gifts like that, the majority of us won’t ever need to worry about filing a gift tax return or paying any related tax for that matter (which is a great thing!).
At what point do you need to consider whether or not gift taxes could affect you? It’s important to know – especially if you have significant amounts of money or items of value that you’d like to gift to family or friends at some point (or throughout the rest of your life).
Who Is Responsible for Paying the Tax When a Gift Is Given?
First, it’s important to note that the donor (person providing the gift) is typically responsible for paying any gift tax due. There are special arrangements under which a donee (person receiving the gift) agrees to pay the tax, but usually, if you give someone a gift, you can expect to be on the hook for this tax. Additionally, the donor is responsible for filing the proper tax forms, if necessary.
What Is Considered a Gift, and What Triggers Gift Tax?
In technical terms, a gift is the transfer of money or property from one individual to another (non-spouse) while receiving very little or nothing in return. This is true whether or not you (the donor) intend on the transfer being a gift to begin with.
As I mentioned in the beginning, most gifts are NOT subject to gift tax. This may be part of why the gift tax is so misunderstood – because most of us don’t have to deal with it, we know very little about how it works. In a nutshell, here’s what you need to remember:
- You can give up to the annual exclusion amount to any number of people each year, without any tax implications. The annual exclusion threshold is currently $15,000.
- Any amount that you give to another person in a particular year that exceeds the annual exclusion amount will need to be reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
- The excess you report on Form 709 will be subtracted from your total lifetime gift and estate tax exclusion. This lifetime exclusion is currently $11,210,000 ($22,420,000 for married couples) – in other words, you can transfer up to $11.21 million over your lifetime (AFTER the annual exclusions) tax-free!
As an example, let’s say that you had 1,000 friends and wanted to give each of them $15,000. You could do so (which would equal a total payout of $15,000,000) without incurring any tax! You wouldn’t even need to fill out a tax form, and your lifetime exclusion wouldn’t be touched.
However, let’s say you wanted to give $16,000 each instead of $15,000. In this case, you’re giving each of your 1,000 friends an additional $1,000 over the annual limit. So, you’d need to report the excess gifts of $1,000,000 (1,000 people x $1,000 excess gift each) on Form 709, and that amount would be subtracted from your lifetime limit of $11.21 million – but you still wouldn’t owe any tax as a result of those gifts (your lifetime exclusion would, however, be reduced to $10.21 million).
What it boils down to is this: you won’t owe any gift tax until you exceed the lifetime exclusion of $11.21 million (and, again, that’s only AFTER considering the annual exclusion you get every year), and many of us will never get to that point!
When Do I Need to File Form 709 or Pay Gift Tax By?
Form 709 must be filed on or before April 15th of the year following the year in which the gift was made. Any federal gift tax due (rate is currently 40 percent) must also be paid by that date.
Why Is There a Gift Tax?
With all of the exemptions available, and with the likelihood of many people never being affected by it, you might wonder why there is a gift tax in the first place. Essentially, the main reason it exists is to ensure that a person cannot completely avoid federal estate tax by giving away all of his/her money before dying. Yes, one can give away money/property over time to several individuals without incurring one cent of gift tax. However, an individual who wants to give large lump sums to select individuals in a short period of time (bequest large sums via a will, for example) would not be able to totally avoid such taxes.
How Can I Strategize to Avoid Gift Tax in the Future?
There are several things you should make note of to avoid paying gift tax in the future. If you play your cards right, you can take full advantage of the available exemptions/thresholds and never pay one bit of gift tax. Here are some pointers to remember:
- Are you married? If so, you and your spouse are each allowed to give $15,000 to an individual in a given year without incurring gift tax. So, let’s say you’d like to gift your child $30,000 towards a down payment on a house. You could do so – $15,000 from you, $15,000 from your spouse – without filing any forms or paying any gift tax.
- On the flip side of the above, let’s say that you and your spouse would like to actually give $50,000 to your child for housing and other costs. How can you do it without incurring tax? Is your child married? If so, you’re set! Remember, you and your spouse can each give $15,000 to another individual tax-free – so, if you each give $15,000 to your child and $15,000 to his/her spouse, you are gifting a total of $60,000 tax-free!
- Are you providing money toward tuition costs or medical expenses for someone? Is this considered a gift? Actually, no! Per the IRS, these types of payments are considered nontaxable gifts and, therefore, are not subject to the gift tax rules….so make sure to exclude such payments from your gift calculations.