What is a gift tax?

Gift Tax Limit 2021: How Much Can You Gift?

What is a gift tax?

For 2021, the annual gift tax exemption will stay at $15,000 per recipient. This means you can give up to $15,000 to as many people as you want during the coming year without any of it being subject to a gift tax.

The gift tax is imposed by the IRS if you transfer money or property to another person without receiving at least equal value in return. This could apply to parents giving money to their children, the gifting of property such as a house or a car, or any other transfer. There is also a lifetime exclusion of $11.58 million.

For help with the gift tax or any other personal finance issues you may have, consider working with a financial advisor.

Gift Tax Limit: Annual

The annual gift tax exclusion is $15,000 for the 2021 tax year. (It was the same for the 2020 tax year.

) This is the amount of money that you can give as a gift to one person, in any given year, without having to pay any gift tax. You never have to pay taxes on gifts that are equal to or less than the annual exclusion limit.

So you don’t need to worry about paying the gift tax on, say, a sweater you bought your nephew for Christmas.

The annual gift exclusion limit applies on a per-recipient basis. This gift tax limit isn’t a cap on the total sum of all your gifts for the year. You can make individual $15,000 gifts to as many people as you want. You just cannot gift any one recipient more than $15,000 within one year. If you’re married, you and your spouse can each gift up to $15,000 to any one recipient.

If you gift more than the exclusion to a recipient, you will need to file tax forms to disclose those gifts to the IRS. You may also have to pay taxes on it. If that’s the case, the tax rates range from 18% up to 40%. However, you won’t have to pay any taxes as long as you haven’t hit the lifetime gift tax exemption.

Gift Tax Limit: Lifetime

Most taxpayers won’t ever pay gift tax because the IRS allows you to gift up to $11.58 million over your lifetime without having to pay gift tax. This is the lifetime gift tax exemption, and it’s roughly $180,000 higher than it was in 2019.

So let’s say that in 2020 you gift $215,000 to your friend. This gift is $200,000 over the annual gift exclusion. That means you will need to report it to the IRS. However, you won’t immediately have to pay tax on that gift.

Instead, the IRS deducts that $200,000 from your lifetime gift tax exemption. Assuming you have never made any other gifts over the annual exemption, your remaining lifetime exemption is now $11.38 million ($11.

58 million minus $200,000).

Most taxpayers will not reach the gift tax limit of $11.58 million over their lifetimes. However, the lifetime gift tax exemption becomes important again when you die and pass on an estate.

What Is the Gift Tax?

The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.

” In other words, if you write a big check, gift some investments or give a car to someone other than your spouse or dependent, you have made a gift. The IRS has a gift tax limit, both for the amount you can give each year and for what you can give over the course of your life.

If you go over those limits, you will have to pay a tax on the amount of gifts that are over the limit. This tax is the gift tax.

In almost every case, the donor is responsible for paying gift tax, not the recipient. A recipient will only pay gift tax in special circumstances where he or she has elected to pay it through an agreement with the donor. Even though recipients don’t face any immediate tax consequences, they can face capital gains tax if they sell gifted property down the line.

There are two numbers to keep in mind as you think about gift tax: the annual gift tax exclusion and the lifetime gift tax exemption.

The Gift Tax & The Estate Tax

The federal government will collect estate tax if your estate has a value of more than the federal estate tax exemption. The exemption for 2019 was $11.4 million, but the exemption will be $11.58 million per individual in 2020, according to the IRS.

At the same time, the exemption for your estate may not be the full $11.58 million. You can only exempt your estate up to the amount of your remaining lifetime gift tax exemption. So let’s say that you have lowered your lifetime exemption down to $10 million by making $1.

4 million in taxable gifts. The federal government would then tax any estate that you pass on to someone for all value over $10 million. In other words, the gift tax and estate tax have a single combined exclusion.

Regardless of whether the gift is passed to the recipient before or after your death, it applies toward that same $11.58 million limit.

Tax rates on the estate tax go up to 40% just as with the gift tax.

All of this means that one way to prevent taxation of any assets you pass on is to gift those assets in increments of $15,000 or less. This could take some planning on your part but it is completely legal. There are also some gifts that you never have to pay tax on.

What Gifts Are Safe From Tax?

Taxable gifts can include cash, checks, property and even interest-free loans. It also applies to anything you sell below fair market value.

For instance, if you sell your home to your non-dependent child for $175,000 when it’s worth $250,000, the $75,000 difference could be considered a gift.

That surpasses the annual gift tax limit and thus is deducted from your lifetime gift tax limit.

What constitutes a gift that counts toward your gift tax limit is generally easy to understand. There are several things that the IRS doesn’t consider a gift, however. You can give unlimited gifts in these categories without facing a gift tax or having to file gift tax paperwork:

  • Anything given to a spouse who is a U.S. citizen
  • Anything given to a dependent
  • Charitable donations
  • Political donations
  • Funds paid directly to educational institutions on behalf of someone else
  • Funds paid directly to medical service or health insurance providers on behalf of someone else

There are, of course, a few exceptions to keep in mind. If your spouse is not a U.S. citizen, you can only give him or her $157,000 each year. Anything above that is subject to gift tax and counts against your lifetime limit.

Funds that cover educational expenses refer only to tuition. That does not include books, dorms or meal plans.

You can skirt the gift tax by contributing to someone’s 529 college savings plan with a lump sum and then spreading it over five years for tax purposes.

The IRS allows taxpayers to donate $75,000 into a 529 plan without paying tax or reducing the $11.58 million lifetime limit. The only caveat is that any additional gifts for the same recipient will count toward your lifetime limit.

Lastly, it’s important to note that charitable donations are not only exempt from gift tax, they may also be eligible as an itemized deduction on your individual income tax return.

How to Pay Gift Tax

The first step to paying gift tax is reporting your gift. Complete IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, on or before your tax filing deadline. Download the document, complete each relevant line and sign and date along the bottom. You then send the form in with the rest of your tax return.

You should complete Form 709 anytime you gift in excess of $15,000 – even if you’re within the $11.58 million lifetime limit. You’ll have to file a Form 709 each year you give a reportable gift, and each form should list all reportable gifts made during the calendar year.

If you live in Connecticut, you may also have to file a state gift tax return. It is the only state that has its own gift tax as of 2019. In most cases, you can file a gift tax return on your own. If your transfers are large or complicated, consider finding a financial professional. CPAs and tax attorneys should be comfortable and confident with gift tax limits, rules and paperwork.

The Bottom Line

The IRS allows every taxpayer is gift up to $15,000 to an individual recipient in one year. There is no limit to the number of recipients you can give a gift to. There is also a lifetime exemption of $11.58 million.

Even if you gift someone more than $15,000 in one year, you will not have to pay any gift taxes unless you go over that lifetime gift tax limit. You will still need to report gifts over the annual exclusion to the IRS via Form 709.

The IRS will lower your remaining lifetime exclusion over time and then use that amount to determine how much of your estate you need to pay estate tax on.

Tips for Getting Through Tax Season

  • If you’re gifting large enough amounts that you’re flirting with the gift tax, then you should probably be working with a financial advisor who can manage and invest your wealth. People who work with financial advisors report greater financial security, and research suggests that working with an advisor can result in additional annual investment returns ranging from 1.5% to 4%. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors, get started now.
  • Any charitable donations that you make are tax deductible. As you plan for your taxes, it’s important to keep track of your potential deductions throughout the year. They could save you money if you make deductions worth more than the standard deduction.
  • One way to maximize your deductions is to use the right tax filing service. Two of the best filing services, H&R Block and TurboTax, both offer tools to help you maximize your deductions. And while both services are easy-to-use, certain taxpayers may prefer one over the other. Here’s a breakdown of H&R Block vs. TurboTax to help you decide which is best for you.

Photo credit: ©iStock.com/donald_gruener, ©iStock.com/Goran13, ©iStock.com/YinYang

Источник: https://smartasset.com/retirement/gift-tax-limits

2020-2021 Gift Tax: What It Is, How It Works And Who Has To Pay It

What is a gift tax?

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.

What is the gift tax?

The gift tax imposes a tax on large gifts, preventing large transfers of wealth without any tax being taken out. Ordinary monetary and property gifts are unly to be impacted by this tax, since the yearly limit for 2020 and 2021 is $15,000 per giver and per recipient.

A single person who gives several $15,000-or-less gifts to different recipients in a year, for example, won’t need to pay the gift tax. In addition, the amount of people with the capacity to give more than this amount is limited, so few people have to consider whether they need to file a gift tax return.

An important consideration, however, is educating yourself on what counts as a gift. If, for instance, you sell a house for substantially less than the IRS would deem its “fair market value” (perhaps as a favor to a friend), the difference between the market value and your price is considered a gift and could need to be declared via a gift tax return if it exceeds $15,000.

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.

Источник: https://www.bankrate.com/taxes/gift-tax/

2020-2021 Gift Tax Rate: What Is It? Who Pays?

What is a gift tax?

There are a lot of things to worry about in life, but the gift tax probably isn’t one of them.

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).

Laid-back loans

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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Источник: https://www.nerdwallet.com/article/taxes/gift-tax-rate

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