What Is the Gift Tax? Relax, You Probably Don't Owe It

Photo credit: Prapass Pulsub - Getty Images
Photo credit: Prapass Pulsub - Getty Images

From Good Housekeeping

When tax time rolls around, you may end up doing a little extra paperwork if you've really made like Saint Nick this year and given out a lot of high-ticket gifts. If you give more than $15,000 in cash or assets in a year to any one person, you need to file a gift tax return. But don't think you're getting off easy just because you didn't write any long checks. What the IRS considers eligible for the tax includes some circumstances you may not consider, like paying for your daughter's wedding, getting added to an elderly relative's bank account to help them keep track of finances, or passing down a new-to-them car to a new driver in the family. But don't panic: If you find yourself in one of these situations, it doesn’t necessarily mean you have to pay a gift tax. It just means you need to fill out and file IRS Form 709 to disclose it. Here's how it works.

How much is the gift tax?

The gift tax rates range from 18% to 40% but most people won't ever have to pay it. That's because the IRS encourages generosity with two types of exemptions, annual and lifetime. The exemptions for 2020 had not been released as of press time, but for 2018 and 2019, the annual exclusion is $15,000 and the lifetime exclusion is $11.4 million. So unless you're set to pass along extreme wealth to your successors, you probably don't have to worry about the gift tax.

"Gift taxes are assessed against your estate when you pass away," explains Priya Malani, founding partner at Stash Wealth financial planning. "The amount you’ve gifted in excess of the lifetime exclusion will count against your estate and you’ll have to pay taxes on the difference."

Keep in mind that the IRS lumps together the value of your estate and your lifetime gifts, then deducts all of that from the $11.5 million limit. The difference can be taxed up to 40%, depending on the amount left over. But that's pretty rare. Only two out of every 1,000 estates owed estate taxes in 2017 — and the annual exemption that year was about half the current exemption, at $5.49 million.

What counts as a gift?

According to the IRS, the gift tax applies to any transfer of property by one individual to another while receiving nothing, or less than full market value, in return. That includes transfers of property you never intended as a gift, as well as some circumstances you might not even consider.

"Some unexpected things can trigger having to file gift tax paperwork," Malani explains. In addition to the circumstances listed above, the IRS considers every transfer of money or property that you won't be fairly compensated for a "gift." That includes lending a friend or family member money interest-free, or even paying medical bills or your child's college tuition. But there are some exceptions to the gift tax.

Exemptions to the gift tax

Charitable donations, giving to political campaigns, and giving to your spouse don't count toward the gift tax, the IRS says. But if you want to pay for expenses for someone else, you can still do that without paying the extra tax. Just watch how you direct the funds. If you write your niece or nephew a check for their college tuition, that's taxable as a gift. Or if you pay off grandma's hip replacement by depositing the money in her account, that's a gift too. But paying tuition or medical bills directly to the institutions won't trigger the gift tax, says certified financial planner Linda Rogers of Planning Within Reach.

Putting money into a 529 college account is also considered a gift, but that type of savings account also counts as an exception. You can save five years' worth of college cash up front, or $75,000, without triggering the gift tax.

It's also important to note that the gift tax is assessed per person, per gift, so if you want to help your child pay for college, you and your spouse can each give them $15,000 per year without filling out the IRS forms. And if you're feeling especially flush after that, you can also give your other child a car to even things out (for example), as long as you and your spouse don't each exceed that $15,000.

Do you have to pay?

The giver always pays the gift tax, so don't worry if you're on the receiving end of someone else's generosity. But most people shouldn't worry about it, both Rogers and Malani explain.

"If you expect to die with extreme wealth, that assumption changes," Malani adds. "For example, if you expect your estate tax rate to exceed your gift tax rate, it may make sense to pay gift taxes in the year you gift and avoid the overage eating into your ability to pass on a larger portion of your estate, tax-free." If that sounds like you, sit down with your accountant to figure out your options.


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