This FAQ about IRS gift tax can go a long way when you’re into estate planning and tax relief.
In this article:
- What Is a Gift Tax?
- What Is the IRS Gift Tax Limit?
- What Is the Lifetime Exclusion on Gift Tax?
- Is There a Way to Give More Without Using the Lifetime Exemption?
- What Gifts Are Tax Exempt?
- What Is the IRS Gift Tax Rule When It Comes to Spouses?
- How Does the Gift Affect Your Taxable Income?
- What Is a Gift Tax Return?
IRS Gift Tax | 8 IRS Rules on Gifts You Need to Know
Fair Market Value Definition: It refers to the price of a product the market and the seller agree to pay.
GST Tax Definition: In relation to the gift tax, GST stands for generation-skipping transfer. This is a type of tax levied on recipients or skip persons who are 37.5 years younger than the giver. These include certain descendants and grandchildren. The purpose of this is to prevent a double taxation on the same estate or asset. A common example is when the grandparents skip the parents and leave cash, property, or trust to their grandchildren.
Estate Tax Definition: This is the tax levied on the net value of the assets left behind by the deceased individual.
1. What Is a Gift Tax?
Those fond of giving expensive assets (such as real estate and vehicles) should remember one thing: IRS gift tax. The Internal Revenue Service (IRS) can require you to file a tax return on high-value presents and to pay taxes on them.
Knowing the IRS gift tax rules spells the difference between saving a lot of money and getting in trouble with the agency. Here is the information you need to know about gift taxes.
The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” In other words, the donor doesn’t expect an exchange or reward for the item. The recipient also doesn’t have the obligation to accept the gift. Once in their possession, they also have the option to do whatever they want with it.
Many gifts of high monetary value are subject to tax. It’s also possible you’ll end up paying for both state and federal tax.
According to the IRS gift tax rule, the donor is responsible for paying the tax. The recipient may choose to pay it under special arrangements with the giver and the IRS.
2. What Is the IRS Gift Tax Limit?
Estate and Gift Tax Limits Increase for 2018, Says the IRS https://t.co/3YoqYYLyHb
— Andrew Cobin (@NC_EstatePlans) December 1, 2017
The basis of the IRS gift tax depends on a few factors. These include the type of gift, its fair market value, and the recipient.
There is an IRS annual gift limit, which can increase each year by $1,000 to adjust for inflation. From 2014 to 2017, the annual gift tax exclusion remained at $14,000. During this period, the inflation rate was low.
The IRS maximum gift limit for 2018 is $15,000 based on the Tax Cuts and Jobs Act (TCJA). It means anything beyond this amount is already subject to the gift tax. The limit is even more generous to couples at $30,000. They can do a split gift. The agency considers the joint gift as coming from each spouse.
The gift tax limit applies per person and recipient. The IRS doesn’t set any maximum number of receivers.
3. What Is the Lifetime Exclusion on Gift Tax?
Besides the annual limit on the IRS gift tax, you also have a lifetime gift tax exemption worth a whopping $11.180 million for each person. This amount is huge since it also includes your lifetime exemption for estate tax and GST tax (generation-skipping transfer tax).
The high exemption is helpful for those doing estate planning. When you die, the government can freeze your assets until it determines the estate’s tax liability. The present estate tax rate can be as much as 40%, which can be difficult on the pocket.
How do you use it to determine your IRS gift tax? If you gave a gift worth over $15,000, you have the option to deduct the difference to your gift and estate tax exemption. This way, you don’t pay any gift tax.
For people with a considerable estate, this strategy is not advisable. It lessens how much you can deduct from your estate tax.
4. Is There a Way to Give More Without Using the Lifetime Exemption?
The IRS seems to believe it is better to give than to receive. You can still avoid using the lifetime exemption because of another gift tax limit, which is $75,000. The only rule is you have to spread the difference over the next five years.
Here’s an illustration. Let’s say you gifted your son $60,000 to let him buy a house. If you want to use the $75,000 exclusion, it means your annual gift tax limit for the next half a decade is only $12,000. The downside of this is you cannot give any more to your son within this period.
5. What Gifts Are Tax Exempt?
The IRS gift tax does not cover all high-value items. The following may be exempt from paying the tax:
- Gifts below the annual or lifetime limit
- Payment of other people’s tuition or medical expenses
- Gifts to spouses
- Presents to political organizations (those for official use)
- Gifts to accredited charitable organizations
6. What Is the IRS Gift Tax Rule When It Comes to Spouses?
In general, IRS tax rules can be confusing due to the many provisions. These include the rules on gifting to spouses.
Under the tax law, presents between couples are under the unlimited marital deduction. It means they can transfer assets, such as property and money, without amount restrictions and tax. The caveat: the spouse should be a citizen. If the spouse is not a citizen, the giver can use the annual gift tax exclusion of $152,000. This amount is different from the $15,000 gift tax limit.
If one of them dies, the surviving spouse can receive the gift and carry over the unlimited marital deduction to their second marriage. The second spouse can inherit the asset without having to pay taxes.
7. How Does the Gift Affect Your Taxable Income?
The basic definition of income is money, wage, or asset you receive as compensation for investment or work. This includes cash, vehicles, fringe benefits, and stock options. Based on this meaning, a gift is not an income. It then follows it doesn’t have any effect on your taxable income or income tax. The recipient also doesn’t need to report the gift to the IRS.
8. What Is a Gift Tax Return?
A taxpayer who qualifies to pay an IRS gift tax needs to secure the IRS Form 709 (United States Gift and Generation-Skipping Transfer Tax Return). They have to file this anytime between January 1 and April 15 of the following tax year. Donors still need to submit the federal gift tax return if they want to avoid paying the liability by using the lifetime exemption.
Note, though, to calculate the tax, focus on the calendar year. For example, you wish to give your child a holiday gift worth $25,000. You deposit $20,000 on December 26 and $5,000 on January 2. For tax purposes, you base your calculation on $20,000, not on $25,000 or $5,000.
It’s okay to be generous, but be mindful of the IRS gift tax as well. Poor planning can mean missing the opportunity to achieve some tax relief and save more money. If you find the rules complex, get assistance from tax professionals.
Have you experienced filing a gift tax return? Share with us your experiences in the comments section below.
Editor’s Note: This article was originally published on December 21, 2017, and has been updated for quality and relevancy.