- What is the Gift Tax in 2020?
- What’s Considered A Gift?
- Annual Gift Exclusion
- Lifetime Gift Exclusion
- What Is the Gift Tax Rate in 2020?
- What Can Be Excluded From Gifts?
- Get Your Taxes Done Right
- 2020-2021 Gift Tax Rate: What Is It? Who Pays?
- What is the gift tax?
- Do you pay taxes when you receive a gift?
- How do I avoid gift tax?
- How gift tax is calculated and how the annual gift tax exclusion works
- How the lifetime gift tax exclusion works
- What is the gift tax rate?
- What can trigger a gift tax return
- Spoiling the grandkids with college money
- Springing for vacations, cars or other stuff
- Laid-back loans
- Elbowing in on a non-spouse bank account
- Sharing the Wealth: How Lifetime Gift Tax Exemption Works
- What is the current estate and gift tax exemption?
- What are some gift tax strategies to reduce the size of your taxable estate?
- What are the rules about giving over the gift tax exclusion?
- Which gifts are exempt from federal gift and estate taxes?
- How does giving to a 529 plan affect the gift tax?
- Your giving plan, going forward
- What Is the Lifetime Gift Tax Exemption in 2020?
- What Is the Lifetime Gift Tax Exemption?
- Lifetime Gift Tax Exemption and Estate Tax
- What Gifts Are Always Exempt?
- Do States Have Gift Taxes?
- Other Gift Tax Exclusions and Exemptions
- The Bottom Line
- Tax Tips
- The Gift Tax Made Simple
- The gift tax only kicks in after lifetime gifts exceed .58 million in 2020
- 2020-2021 Gift Tax: What It Is, How It Works And Who Has To Pay It
- How does the gift tax work?
- Who has to pay the gift tax?
- How can you avoid the gift tax?
What is the Gift Tax in 2020?
It seems Uncle Sam can manage to take a cut of everything these days, but does the government really tax gifts? Yup (cue the eye roll). But don’t worry—there’s no need to put your generosity on hold.
Let’s take a closer look at what you need to know when it comes to gifts and taxes so you’re ready to roll when you’re out there living and giving no one else.
What’s Considered A Gift?
Alright, trivia time! What do the $500 you got for your birthday and that car Grandpa bought Junior for his high school graduation have in common? If you answered that they’re both considered taxable gifts, then you would be correct. But wait, what?
That’s right. Anything someone gives you as a gift could potentially have Uncle Sam calling first dibs. But before we get to the tax part, let’s first settle what actually qualifies as a gift.
Basically, any asset—think cash or property—that you give to someone without getting something of equal value (aka fair market value) in return is considered a gift, according to the government.
Taxes shouldn't be this complicated. Let us help.
For example, if you loan a friend $5,000 without charging interest, the government says that’s a gift. (It’s also a bad idea—you don’t want to turn your friendship into a bank relationship by playing with loans!) What about forgiving a loan from way back when? Gift. Blessing a friend with cash to help them get through a hard time. Yup, that’s a gift too.
Basically, any asset—think cash or property—that you give to someone without getting something of equal value (aka fair market value) in return is considered a gift, according to the government.
If you give someone a gift, you’re usually the one who has to pay up for the gift tax. And while that’s not set in stone, you’d have to make special arrangements for the recipient to pay it instead (and that’s pretty uncommon).
So, do you always have to pay taxes on gifts of any amount? Don’t start rethinking that $20 birthday card you were planning to send your nephew just yet. Thankfully, you don’t have to pay taxes on every gift. (Phew!)
So, do you always have to pay taxes on gifts of any amount? Don’t start rethinking that $20 birthday card you were planning to send your nephew just yet. Thankfully, you don’t have to pay taxes on every gift.
Annual Gift Exclusion
Even if you do give outrageously, you wouldn’t have to file a gift tax return unless the gift was more than the annual exclusion limit (the cap on tax-free gifts), which is a whopping $15,000 per person per year.So, for example, you would theoretically be able to give a max of $15,000 to your mom, $15,000 to your brother, and $15,000 to your pal all in the same year without activating the gift tax.
It’s when you give more than $15,000 to one person in a calendar year that this dance gets a little more complicated.
Let’s say you want to help your daughter buy her first home, so you cut her a $30,000 check. To figure out how much is taxable, you’d subtract the annual $15,000 exclusion from the total.
In this case, the remaining $15,000 is taxable.
So, while you would have to file a gift tax return, you would only be responsible for taxes on $15,000 of the $30,000—or you can apply it to your lifetime gift exclusion (more on that in a minute).
And as an added bonus if you’re married, each spouse is entitled to the $15,000 exclusion. So looking at the same example, you could each give your daughter $15,000 for a total of $30,000 without going over the annual limit.
Lifetime Gift Exclusion
Another way to dance around the gift tax is the lifetime gift tax exclusion. This is the total amount—$11.4 million for 2019 and $11.58 million for 2020—you’re able to give away tax-free over the course of your lifetime and is also shared with the estate tax.
Think back to our first example: You want to give your daughter a gift of $30,000. The first $15,000 would be free and clear of taxes.
For the remaining $15,000, you’ll have to file a gift tax return—but you don’t necessarily have to pay taxes on that extra. You can choose to apply that amount to your lifetime exclusion.
In this case, you would simply subtract $15,000 from your lifetime cap of $11.58 million, leaving you $11.565 million to work with.
So why the tax return, if you can just exclude the gift tax? It’s simply a way for the IRS to keep track of your lifetime exclusion limit.
The more you have knocked off your lifetime exclusion, the less you’ll have left over to protect your estate from getting hit with taxes down the road.
Now, this won’t apply to many people, but if you think your estate will blow past that lifetime cap—if so, good for you!—then it might make sense to go ahead and pay taxes on gifts now so that you can protect your estate later.
As wonderful as gifts are, they can still stir up some confusion—so be sure to work with a tax pro. That way, you can have peace of mind knowing there’s someone in your corner to help make sure you’re making the right calls for your situation.
What Is the Gift Tax Rate in 2020?
If you manage to use up all of your exclusions, you may indeed have to pay the gift tax. If that’s the case for you, buckle up—the actual gift tax rate can vary between 18% and 40% depending on the amount you’re giving. That’s certainly not chump change!
It’s important to remember that gift tax rates can change—and change often—so always be sure you’re working with a tax pro so you’ve got the most up-to-date information.
What Can Be Excluded From Gifts?
While most gifts are technically taxable, there are a few exceptions to the rule. Generally, the types of gifts that would not be considered taxable include:
- Gifts that don’t go over the annual exclusion for the calendar year ($15,000 as of 2020)
- School tuition or medical expenses you pay for someone (as long as those payments go directly to the educational and medical institutions and not to an individual)
- Gifts to your spouse in any amount if they are a U.S. citizen—if they’re not a citizen, that annual exclusion limit is $157,000 for 2020
- Gifts to a political organization
While we’re talking taxable gifts, it’s important to note that only certain types of gifts can be deducted from your taxable income—usually those are gifts donated to a qualifying charity, called charitable donations. So be sure to do your homework or get with a tax pro to know how your generosity might affect your taxable income.
Get Your Taxes Done Right
Taxes may complicate your gift-giving a little but remember: Being generous is an awesome thing! You get to be a blessing to someone else and feel pretty great doing it.
Sure, there are a few considerations to keep in mind for the tax side of things, but don’t let that freak you out! We know taxes can be tricky and confusing.
If you have a relatively simple return and want to try filing on your own, check out RamseySmartTax.
If you’re feeling uncertain about what to do with your gifts—or any other tax situation—we’ve got your back.
Get in touch with a tax Endorsed Local Provider (ELP) to make sure all your bases are covered and eliminate the uncertainty. They take the time to get to know you and your financial situation so they can help you file your taxes with confidence.
Find your pro today!
2020-2021 Gift Tax Rate: What Is It? Who Pays?
There are a lot of things to worry about in life, but the gift tax probably isn’t one of them.
What is the gift tax?
Gift tax is a federal tax on transfers of money or property to other people while getting nothing (or less than full value) in return. Few people owe gift tax; the IRS generally isn’t involved unless a gift exceeds $15,000. Even then, it might only trigger extra paperwork.
Do you pay taxes when you receive a gift?
In most cases, no. Assets you receive as a gift or inheritance typically aren’t taxable income at the federal level. However, if the assets later produce income (perhaps they earn interest or dividends, or you collect rent), that income is ly taxable. IRS Publication 525 has the details. Also, some states have inheritance taxes.
How do I avoid gift tax?
Two things keep the IRS’ hands most people's candy dish: the $15,000 annual exclusion in 2020 and 2021, and the $11.58 million lifetime exclusion in 2020 ($11.7 million in 2021). Stay below those and you can be generous under the radar. Go above, and you'll have to fill out a gift tax form when filing returns — but you still might avoid having to pay any gift tax.
Learn more about what's different for taxpayers as part of the federal government's response to the coronavirus.
How gift tax is calculated and how the annual gift tax exclusion works
- In 2020 and 2021, you can give up to $15,000 to someone in a year and generally not have to deal with the IRS about it.
- If you give more than $15,000 in cash or assets (for example, stocks, land, a new car) in a year to any one person, you need to file a gift tax return. That doesn’t mean you have to pay a gift tax. It just means you need to file IRS Form 709 to disclose the gift.
- The annual exclusion is per recipient; it isn’t the sum total of all your gifts. That means, for example, that you can give $15,000 to your cousin, another $15,000 to a friend, another $15,000 to the neighbor, and so on all in the same year without having to file a gift tax return.
- The annual exclusion also is per person, which means that if you’re married, you and your spouse could give away a combined $30,000 a year to whomever without having to file a gift tax return.
- Gifts between spouses are unlimited and generally don’t trigger a gift tax return. Gifts to nonprofits are charitable donations, not gifts.
- The person receiving the gift usually doesn't need to report the gift.
How the lifetime gift tax exclusion works
- On top of the $15,000 annual exclusion, you get an $11.58 million lifetime exclusion (in 2021, that rises to $11.7 million). And because it’s per person, married couples can exclude double that in lifetime gifts. That comes in handy when you’re giving away more than $15,000.
- “Think about buckets or cups,” says Christopher Picciurro, a certified public accountant and co-founder of accounting and advisory firm Integrated Financial Group in Michigan. Any excess “spills over” into the lifetime exclusion bucket.
- For example, if you give your brother $50,000 this year, you’ll use up your $15,000 annual exclusion. The bad news is that you’ll need to file a gift tax return, but the good news is that you probably won’t pay a gift tax. Why? Because the extra $35,000 ($50,000 – $15,000) simply counts against your $11.58 million lifetime exclusion. Next year, if you give your brother another $50,000, the same thing happens: you use up your $15,000 annual exclusion and whittle away another $35,000 of your lifetime exclusion.
- The gift tax return keeps track of that lifetime exemption. So if you don't gift anything during your life, then you have your whole lifetime exemption to use against your estate when you die.
» MORE: See how a wealth tax works
What is the gift tax rate?
If you’re lucky enough and generous enough to use up your exclusions, you may indeed have to pay the gift tax. The rates range from 18% to 40%, and the giver generally pays the tax. There are, of course, exceptions and special rules for calculating the tax, so see the instructions to IRS Form 709 for all the details.
What can trigger a gift tax return
Caring is sharing, but some situations often inadvertently trigger the need to file a gift tax return, pros say.
Spoiling the grandkids with college money
- Picciurro explains it this. “Let's say Grandma and Grandpa say, ‘We don't really your husband and we don't really you, but we really our grandkids. So we're going to give $60,000 and we're going to put it in a 529 plan for them so their college is paid for.’ Well, Grandma and Grandpa just triggered the gift tax exclusion because it's over [$15,000].”
- A special rule allows gift givers to spread one-time gifts across five years’ worth of gift tax returns to preserve their lifetime gift exclusion.
» MORE: Learn how inherited IRAs work
Springing for vacations, cars or other stuff
- If you fork out $40,000 for Junior’s wedding, or just pay for the crazy-expensive honeymoon, get ready to do some paperwork.
- If you’re paying tuition or medical bills, paying the school or hospital directly can help avoid the gift tax return requirement (see the instructions to IRS Form 709 for details).
Lending money to friends and family is usually a bad idea, and the IRS can make it even worse. It considers interest-free loans as gifts. Or if you lend them money and later decide they don't need to repay you, that's also a gift.
Elbowing in on a non-spouse bank account
“Let’s say you live by Grandma, so for convenience, we're going to put you on Grandma's bank account. Guess what just happened?” Picciurro says. “If you're put as a joint [owner] on a bank account with somebody and you have the right to take the money out at any time, essentially Grandma is giving you a gift.”
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Sharing the Wealth: How Lifetime Gift Tax Exemption Works
When it comes to sharing your wealth, there may be no better time than the present.
“Many times, it’s better to give money or assets to your loved ones while you’re still around rather than wait until after you pass,” advises Hayden Adams, CPA and director of tax and financial planning at the Schwab Center for Financial Research.
In addition to the emotional lift giving to those you care about brings, giving now can also be a savvy tax move for families with substantial wealth. That’s because both the present value and any potential future growth of the transferred assets are removed from your taxable estate.
It’s important to remember that although the IRS generally doesn’t care when you make a major gift, the timing can make a big difference to your heirs. Giving a smaller amount when your heirs need it and you're still alive can be more meaningful for everyone than waiting to pass on a larger amount after you're gone. What matters is what would work best for your family.
Just make sure you understand all of the rules.
What is the current estate and gift tax exemption?
The IRS allows a lifetime tax exemption on gifts and estates up to a certain limit, which is adjusted yearly to keep pace with inflation.
For 2019, an individual’s combined lifetime exemption from federal gift or estate taxes totals $11.4 million. If married, the joint exemption is $22.8 million. (U.S. citizens also have an unlimited exemption from property they inherit from a spouse.)
You can use all or part of your gift and estate tax exemption during your lifetime. Any portion left over can then be used by your heirs to reduce or eliminate estate taxes that might otherwise be owed. That can be a big deal for your heirs, as the top federal estate tax rate currently stands at 40%.
“If the inheritance your heirs receive is subject to the estate tax, your loved ones many not receive all that you had hoped they would,” explains Hayden.
Even if your gifts use up your entire exemption, your loved ones could still come out ahead—they would get your largesse tax-free today and could take advantage of its potential for growth.
However, there are specific giving strategies you can use today that can reduce the size of your taxable estate and leave your gift and estate tax exemption untouched. Here’s how to enjoy giving today and potentially save your family money down the line.
What are some gift tax strategies to reduce the size of your taxable estate?
There is an annual $15,000 gift tax exclusion for assets you give to individuals—also indexed to inflation—separate from the lifetime gift and estate tax exemption.
By utilizing this gift tax exclusion, not a penny of your gift counts against your $11.4 million lifetime gift and estate tax exemption.
And because annual gifts reduce the size of your estate, they reduce the potential tax liability for your heirs.
You’re allowed to individually give that amount to as many people as you . If married, you and your spouse may each give $15,000 to a particular individual, for a total annual gift of $30,000. For example, a married couple could give $30,000 to an adult child and $30,000 to each of their three grandchildren, for a total of $120,000 each year.
Even though you and your spouse would be combining both $15,000 exclusions, this strategy is called “gift splitting.” And although you won’t owe any additional taxes to the IRS, splitting gifts may still require you to file a gift tax return—Form 709—for the purpose of documentation.
Making a $15,000 annual gift can also be incredibly easy. Unless you and a spouse are gift splitting, you don’t need to file a gift tax return. Recipients typically owe no tax and aren’t required to file any special tax forms.
What are the rules about giving over the gift tax exclusion?
Let’s consider the following: Suppose you give two grandchildren $20,000 each this year, and you give a family friend $10,000. The gift to the friend doesn’t trigger any gift tax issues, as it’s within the $15,000 annual exclusion. But the gifts to the grandchildren exceed the exempt amount by $5,000 apiece and would require special care.
The amount that overran the $15,000 annual limit would be deducted from your $11.4 million lifetime gift and estate tax exemption.
Unless you have already used up all of your lifetime exemption, you won’t actually owe any tax on the gifts to the grandchildren. You will, however, need to let the IRS know that those gifts exceeded the annual limit by filing a gift tax return.
In this example, your lifetime gift exemption is reduced by a total of $10,000 ($5,000 for each grandchild).
Which gifts are exempt from federal gift and estate taxes?
In addition to the $15,000 gift-giving strategy, there are other ways you can make gifts that reduce the size of your estate without eating into your lifetime gift and estate tax exclusion.
The IRS gives you a free pass when:
- You pay the medical bills for another individual.1
- You pay the tuition bills of a student.2
- You make a charitable contribution to an exempt organization.
There is no annual limit on the size of these gifts. As far as taxes go, it’s as if those weren’t gifts at all.
One important caveat when it comes to medical and tuition bill gifts, however: The money must go directly to the institutions, rather than to the patient or student you’re helping.
How does giving to a 529 plan affect the gift tax?
If you wish to help fund a 529 college savings plan, the $15,000 annual gift limit comes back into play.
But in this case, you’re allowed to bundle five years’ worth of $15,000 gift tax exemptions into an initial $75,000 contribution to one student’s 529.
Bear in mind that any additional gifts to that individual during the next five years will put you over the annual giving limit, so your lifetime exclusion will be reduced by the additional amounts.
Also, if you die in the five years after you make the gift, a prorated amount of your gift will get tossed back into your estate, but only for tax purposes. The money you gave stays in the 529 account.
Your giving plan, going forward
The bottom line is that giving sooner might make more sense rather than waiting to bequeath your assets after you die. Hayden advises sitting down with a tax and estate professional to consider how a giving strategy fits in with your overall investment plan, and to determine whether it makes sense for you to give now or later.
“For many people gifting over their lifetime can be a great strategy, so long as they leave themselves enough to live on. With so much at stake, be sure to plan carefully with the help of a professional,” says Hayden.
1Medical care includes expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, or for transportation primarily for and essential to medical care. Medical care also includes amounts paid for medical insurance on behalf of any individual.
2Does not include books, supplies, room and board, or other similar expenses that are not direct tuition costs.
What Is the Lifetime Gift Tax Exemption in 2020?
They say it’s better to give than to receive. But when you’re the one doing the giving, there are some extra things that you’ll have to take into account besides the packaging – the gift tax and the lifetime gift tax exemption.
When giving sizable gifts, it’s important to know about the laws surrounding the gift tax so that you don’t end up with any surprising tax bills or other difficulties. The lifetime gift tax exemption looks at how your gifts accumulate over the course of your lifetime.
A financial advisor can help with gift taxes and any other financial issues you may have.
What Is the Lifetime Gift Tax Exemption?
Starting in 2020, the lifetime gift tax exemption is $11.58 million. This means that you can give up to $11.
58 million in gifts over the course of your lifetime without ever having to pay gift tax on it. For married couples, both spouses get the $11.58 million exemption.
This means that if you are married, you and your spouse can give away a total of $23.16 million before paying the gift tax.
One important thing to remember is that even if you don’t come close to exceeding this exemption, you still may be required to file gift tax returns. Thus, it’s important to make note of the gifts you give. If you aren’t sure if you should be filing a gift tax return, you may want to check with a financial advisor, who can tell you what the requirements are in your situation.
Lifetime Gift Tax Exemption and Estate Tax
The lifetime gift tax exemption ties directly to the federal estate tax. The federal estate tax kicks in for estates that are worth more than $11.
58 million, the same amount as the lifetime gift tax exemption.
(The federal estate tax exemption is transferable between spouses, meaning that when the second spouse in a married couple dies, their estate can effectively have a $23.16 million exemption.)
Gifts made each year in excess of the $15,000 annual limit per recipient reduce your federal estate tax exemption when you die. For instance, let’s say you give your grandson a gift of $25,000 in one year. The first $15,000 is not taxable because of the annual exclusion.
After that, though, the remaining $10,000 counts against both your lifetime gift tax exemption and your federal estate tax exemption. When you die, your federal estate tax exemption will be $11.57 million. All money in excess of that amount will be subject to estate taxes.
What Gifts Are Always Exempt?
Certain gifts are not considered taxable. These include:
- Gifts to charities approved by the IRS
- A gift to your spouse (as long as he or she is a U.S. citizen)
- A gift to cover someone’s education tuition, if paid directly to the educational institution (does not cover gifts to cover room and board, books or supplies)
- Gifts to cover someone’s medical expenses, if paid directly to the medical facility
- A gift to a political organization
Because gifts in one of these categories are always exempt from the federal gift tax, you don’t need to report them to the IRS. Additionally, gifts to qualifying charities can actually be deducted from the total amount of gifts you made.
Do States Have Gift Taxes?
Connecticut is the only state to currently levy a gift tax. It has a $3.60 million lifetime exemption as of 2019. Beginning in 2020, Connecticut’s exemption will match the federal exemption level, which is currently $11.58 million. Gifts of more than $10,000 must be filed.
While Connecticut is now the only state with a gift tax, a number of states used to have gift taxes. Minnesota passed a gift tax in 2013 but then repealed it less than a year later. Tennessee repealed its gift tax in 2012. Residents of all states, of course, still have to abide by federal gift tax laws.
Other Gift Tax Exclusions and Exemptions
In addition to the lifetime gift tax exemption, there is also an annual gift tax exclusion to keep in mind. The annual gift tax exclusion for 2021 will be $15,000 (the same as it was for 2019 and 2020).
That number may rise in the future as inflation impacts the value of the U.S. dollar. The annual gift tax applies to each individual person you give a gift to.
This means that you can give up to $15,000 to as many people as you want in a given calendar year without impacting your lifetime gift tax exemption.
Let’s say you’re a grandparent with a sizable amount of money in the bank.
You know that your estate will be subject to the estate tax when you die, but you want to pass some of your money to your family before that happens.
If you have two children and six grandchildren, you can give $15,000 to each of them every calendar year. None of that will be subject to the gift tax or count towards your lifetime gift tax exclusion.
You won’t need to include on your tax return gift amounts that do not exceed the annual gift tax exclusion set by the IRS.
However, if you do exceed the annual gift tax exclusion, you’ll have to pay taxes on the gift. Rates range anywhere from 18% to 40%.
The amount by which you exceeded the annual gift tax exclusion will also be deducted from your lifetime gift tax exemption and your federal estate tax exemption.
The Bottom Line
The lifetime gift tax exemption is $11.58 million. The annual gift tax exclusion is $15,000.
Any gift over that amount given to a single person in one year decreases both your lifetime gift tax exemption and the federal estate tax exemption you will receive when you die. There are a number of gifts, though, that are always exempt.
Even if you are nowhere near your lifetime gift tax exemption, you must still report any gift over the $15,000 annual exclusion to the IRS when you file your taxes.
- If you’re wondering whether you owe gift tax or other taxes, you might want to talk to a financial advisor. SmartAsset can help you find an advisor with our free financial advisor matching service. You answer a few questions, and we match you with up to three financial advisors in your area. We’ve fully vetted all of the advisors on our platform, and they are free of disclosures. You can then interview each advisor to see if one of them is a good fit for you.
- Before you think about the estate tax or the gift tax, you’ll probably have to think about your retirement taxes. Use SmartAsset’s retirement tax calculator to estimate how much you’ll owe the state in which you live.
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com/Melpomenem, ©iStock.com/artisteer, ©iStock.com/ChristianChan
The Gift Tax Made Simple
Updated for Tax Year 2020
If you make large enough gifts to relatives or friends, you might owe the federal gift tax. Here are the basics on how the gift tax works.
The federal tax filing deadline for individuals has been extended to May 17, 2021. Quarterly estimated tax payments are still due on April 15, 2021. For additional questions and the latest information on the tax deadline change, visit our “IRS Announced Federal Tax Filing and Payment Deadline Extension” blog post.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
The gift tax only kicks in after lifetime gifts exceed $11.58 million in 2020
The first thing to know about the federal gift tax is that gift givers—not gift recipients—have to pay it. Thankfully, you won’t owe the tax until you’ve given away more than $11 million in cash or other assets during your lifetime.
- The lifetime exclusion was raised to $11.58 million in 2020.
- If you’re married, your spouse is entitled to a separate $11.58 million in 2020.
So, actually owing the gift tax is not a concern for most folks. But you may still have to file gift tax returns even though you don’t owe any tax.
The annual federal gift tax exclusion allows you to give away up to $15,000 in 2020 to as many people as you wish without those gifts counting against your $11.58 million lifetime exemption. (After 2020, the $15,000 exclusion may be increased for inflation.)
Say you give two favored relatives $20,000 each in 2020 and give another relative $10,000. The $20,000 gifts are called taxable gifts because they exceed the $15,000 annual exclusion. But you won’t actually owe any gift tax unless you’ve exhausted your lifetime exemption amount.
- Assuming you haven’t, the two taxable gifts simply reduce your lifetime exemption by $10,000
- ($20,000 – $15,000) x 2 = $10,000.
- The other gift of $10,000 is ignored, because it’s below the $15,000 annual exclusion for 2020.
If you give three individuals $15,000 each in 2020, these gifts are ignored because they don’t exceed the annual exclusion.
You have a $11.58 million federal estate tax exemption for 2020. You can leave up to that amount to relatives or friends free of any federal estate tax. If you’re married, your spouse is entitled to a separate $11.58 million exemption.
Gifts made during your lifetime will reduce your taxable estate. However, gifts in excess of the annual exclusion also reduce your estate tax exemption.
- In the earlier example, the two $20,000 taxable gifts made in 2020 would reduce your estate tax exemption by $10,000 to $11,570,000 ($11,580,000- $10,000), the recently enacted changes in estate law.
- The $10,000 gift in 2020 and the three $15,000 gifts in 2020 would not reduce your estate tax exemption.
Bottom line: Making annual gifts up to the exclusion ($15,000 in 2020) is a good way to reduce your taxable estate without any negative side effects.
Contributions to a 529 college savings plan are gifts to the future student. However, a special rule allows you to make a lump-sum contribution and spread it over five years for gift tax purposes.
For example, you can contribute $75,000 in 2020 to jump-start a 529 college savings account for your child. If you’re married, your spouse can do the same.
- You can spread the gift over 2020-2023 without incurring any gift tax and without reducing your $11.58 million lifetime gift tax exemption or your $11.58 million estate tax exemption.
- Your spouse can spread his or her $75,000 gift over five years as well.
The only caveat: You can’t make any additional gifts to the same recipient during those years without using part of your $11.58 million exemption.
Among others, the following types of gifts are exempt from the federal gift tax. You can make unlimited gifts in these categories without any gift tax or estate tax consequences and without having to file gift tax returns:
- Gifts to IRS-approved charities
- Gifts to your spouse (assuming he or she is a U.S. citizen)
- Gifts covering another person’s medical expenses, as long as you make the payments directly to medical service providers
- Gifts covering another person’s tuition expenses, as long as you make payments directly to the educational institution. (Payments for room and board, books, and supplies don’t qualify for this exception, but you can cover those costs by making a direct gift to the student under the annual exclusion.)
If you make a taxable gift (one in excess of the annual exclusion), you must file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return.
- The return is required even if you don’t actually owe any gift tax because of the $11.58 million lifetime exemption.
- The return is due by the tax filing deadline, typically May 17, 2021, of the year after you make the gift—the same deadline as Form 1040.
- If you extend your 1040 to October 15, the extended due date applies to your gift tax return too.
If you’re married, you can’t file a joint gift tax return. Each spouse must file a separate return if he or she makes any taxable gifts. You can, however, choose to “split” gifts with your spouse. Making a split gift allows you to take advantage of your annual gift tax exclusion plus your spouse’s exclusion for a gift that is made entirely by you.
For example, say you gave $30,000 to your child in 2020. By treating it as a split gift, you can completely shelter the gift with your $15,000 exclusion plus your spouse’s $15,000 exclusion.
- That way no gift tax is due.
- The gift doesn't reduce the $11.58 million lifetime gift tax exemption in effect for 2020 or the estate tax exemption for you or your spouse.
If you choose to make a split gift, you must file Form 709, and your spouse must consent to the arrangement.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice.
Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
2020-2021 Gift Tax: What It Is, How It Works And Who Has To Pay It
For people hoping to optimize their tax returns, know that a special tax return is triggered if you give a gift and exceed the gift tax limit. This return helps you determine whether you owe a rare but important tax known as the gift tax.
How does the gift tax work?
Should you find yourself in a position to give more gifts than $15,000 a year per recipient, there are still a few more ways you could be exempt from payment.
While you’ll still have to file a return that declares your gift because it’s above the $15,000 annual exemption, there’s also a lifetime exemption. Say you gifted $25,000 to a family member in 2020.
That gift applies to your $15,000 annual exclusion, and the remaining $10,000 applies to your lifetime exclusion, which for 2020 is $11.58 million. For 2021, the lifetime exclusion rises to $11.7 million.
Those lifetime figures are drawn from the estate tax exemption, since the lifetime exemption is a combination of gifts made during life and from your estate after death.
You can see how most people, even if they do need to track and declare large gifts, still won’t be liable for gift tax.
There are other kinds of gifts that are exempted entirely, as well, including:
- Gifts to directly pay for medical or educational expenses
- Gifts to a political organization to be used by the organization
- Gifts to one’s spouse (some limits apply if the spouse is not a U.S. citizen)
Who has to pay the gift tax?
Fortunately for the gift recipient, the giver pays the gift tax if any is due. If the giver is in a position to owe gift tax, they won’t require the recipient to pay the tax alongside receiving the gift.
In general, very few people pay the gift tax, since even large five- and six-figure gifts only count toward the lifetime exemption. The most common time gift taxes are paid is when it’s tied to an estate, since very large estates can exceed the multimillion-dollar limit.
The bigger question is whether you need to file a gift tax return, which reports large gifts that contribute to your overall lifetime exemption to the IRS.
Again, while this is fairly rare, knowing that you owe the IRS some paperwork is important.
It’s also worth considering spreading out gifts to children, grandchildren or other family members or friends so that you don’t exceed the $15,000 per person a year limit, which saves you from a little tax return complexity.
How can you avoid the gift tax?
Pretty much everyone can avoid having to pay the gift tax, but in the event that you are in a position to give extensively, here are some important tips:
- If you are part of a couple, remember that you can each give $15,000 a year to the same recipient, effectively giving $30,000 to one recipient without breaking past the annual exemption.
- Spread out gifts or find ways to pay directly for medical or educational expenses, rather than gifting funds for any purpose.
- Factor into your estate plan how much you’ve given or plan to give in your lifetime plus what you expect to give through your estate, since the gift tax lifetime exemption also includes anything you leave in your estate after you pass away.
- Talk with your accountant or wealth management team about how you can distribute your assets in ways that won’t trigger gift tax. Large and complex financial holdings can generate big tax bills without someone helping you work out the logistics.
The good news is that most people aren’t affected by the gift tax or the gift tax limits and aren’t required to disclose smaller gifts to the IRS.
However, if you know that you’re making what could be counted as a large gift — such as extending an interest-free loan or giving someone money now that they will later use for college, but haven’t yet spent — make sure you find out if it will require you to at least file a gift tax return.