Gift tax is a tax that you potentially may have to pay for gifting property to another person. In this article, we will go over the basics of how gift taxes work, so you can understand how it affects you
The Basics
Whether or not your gift will be subject to tax will depend on how much the fit was worth and how it was given to. Typically, any gift given to a spouse, a political organization for us, or directly to a medical or education facility on behalf of another person are exempt. Any gift made to anyone else must stay under the annual and lifetime gift tax exclusions to remain exempt from gift tax.
Annual and Lifetime Gift Tax Exclusions
There are two different exclusion amounts you need to keep track of when it comes to gift taxes. The first is the annual exclusion. This is the amount you can give to an individual without it being subject to gift taxes. For 2018, the annual exclusion is $15,000 per person.
You should be aware that you do have the ability to spread a gift across five tax years. For example, if you give $75,000 in 2018 to one of your children, you can break that amount down over five years so that you can stay below the $15,000 per person annual exclusion limit.
The lifetime exclusion is the amount you can give away during your lifetime or through your estate after you pass. For 2018, the lifetime exclusion limit is $11,180,000.
Advantages and Disadvantages of Gifts
As with any financial choice you make, there are both advantages and disadvantages of making gifts. Some advantages of making gifts include:
- They reduce your estate taxes. By gifting an asset before you pass it removes the appreciation on that asset from your estate. Which may help to reduce your estate taxes.
- It can reduce income tax. If you gift an asset, such as a rental property, that produces a lot of income it may help to reduce your income tax by transferring the income to another family member in a lower tax bracket.
Here are a few disadvantages of making gifts:
- Gifts reduce your net worth. By gifting assets, you reduce your net worth and you also eliminate your access to that asset.
- You may generate kiddie tax. If you gift money to children under 19, you may make a gift that is susceptible to the kiddie tax. Which can be costly for the parents of the beneficiary.
Reporting Gift Tax
If you have a gift that exceeds the annual or lifetime exclusion amounts you will need to make sure that you pay taxes on the excess amount. To do this you will need to file IRS form 709: US Gift Tax Return. This is due in April of the year following the year you made the gift in. However, there is no joint Form 709. So if you and your spouse both make gifts you will each need to file a Form 709.
Making Gifts
Before making any gifts, it is important that you have a discussion with your tax preparer. Gift tax can be complicated and will differ for each person. So be sure to fully educate yourself before making any gifts.
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