A gift tax is imposed by the IRS when you transfer money or property to another person and don’t get anything—or less than full value—in return. The gift giver pays the tax. In 2019, you can give up to the $15,000 annual exclusion and the $11.4 million lifetime exclusion without having to pay taxes on your gift(s).
If you give beyond these exclusion limits, you will need to fill out a gift tax form—most likely Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return—when filing your tax returns on or before April 15. However, you may not have to pay any gift tax, even if you must submit the form.
Gift tax rates range from 18% to 40%. There are exceptions and special rules for calculating the tax, so be sure to read the instructions on IRS Form 709 for all the details when you file.
Annual gift tax exclusion
In a year, you can give up to $15,000 in cash or assets (e.g., stocks, land, a new car, etc.) to any one person and not need to file a gift tax return. This annual exclusion is per gift recipient, so you could give $15,000 to 5, 10, 20 people and still not have to fill out a gift tax return. And because the exclusion is also per gift giver, you and your spouse could give away a combined $30,000 a year per recipient without having to report it to the IRS.
This annual exclusion doesn’t apply to gifts between spouses—those are unlimited if you’re both U.S. citizens—nor to gifts to nonprofits (those are charitable donations and go on a separate tax form).
Now, if you do give more than $15,000 in a year to any one person and you file a gift tax return, that doesn’t mean you’ll have to pay a gift tax on it. Read on to learn why.
Lifetime gift tax exclusion
If you gave your niece $25,000, you would use up your $15,000 annual exclusion and you’d need to file a gift tax return, but you probably wouldn’t need to pay the gift tax because the amount beyond $15,000—in this case $10,000 ($25,000 - $15,000 = $10,000)—would just count against your $11.4 million lifetime exclusion. Think of each exclusion as buckets: as soon as you fill your annual bucket by gifting more than $15,000, your lifetime bucket catches the spillover and prevents you from owing taxes until you exceed that bucket’s $11.4 million limit.
In other words, you generally won’t owe gift tax until you’ve given away more than $11.4 million in cash or other assets in your lifetime. The gift tax return you file each year that you gift more than $15,000 is what keeps track of your lifetime exemption total.
If you don’t gift anything above the annual exemption limit in your life, then you’ll have your entire lifetime exemption to use against your estate when you die. Another way to think of it is that you could leave up to $11.4 million to friends and family free of any federal estate taxes if your lifetime exclusion is still intact!
Making annual gifts up to the current exclusion is a good way to reduce your taxable estate. However, if your gifts exceed the exclusions, it will reduce your estate tax exemption, so there is a fine balance to strike in your generosity to minimize your tax liability (the taxes you owe).
Examples of tax return–triggering scenarios
Remember, just because you must file a gift tax return doesn’t mean you’ll owe any tax.
1. Say you’re a grandparent who wants to gift $74,000 to your grandchild to pay for their future college tuition, so you put it into their 529 college saving plan. This will require you to file the gift tax return, but a special rule allows you to spread one-time gifts across five years’ worth of tax returns to keep the lifetime gift exclusion intact, i.e. not incurring any gift tax and not reducing your $14 million lifetime exclusion. However, you won’t be able to make any additional gifts to that grandchild during those five years without counting it toward your lifetime exclusion total.
2. If you generously pay $50,000 for someone’s wedding, honeymoon, new car, or vacation, that would trigger needing to file a gift tax return with the IRS. Depending on how close you are to your lifetime exclusion total, you may or may not have to pay taxes on the gift.
3. Interest-free loans to family and friends are considered gifts and must be reported as such if they exceed the annual exclusion.
4. An exception: You don’t need to file a gift tax return if you pay tuition or medical bills directly to a school or hospital for someone else.
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