Sometimes, it pays to be generous. If you have given away a large sum of money in the past year, you can use exemptions and exclusions to the gift tax to protect the value of that transfer of wealth.
What is the Gift Tax?
This Federal tax is applied to gifts of value transferred from one person to another. The IRS considers something to be a gift if the recipient pays less than the full value of the gift.
The tax was instituted to prevent people from avoiding the estate tax by giving away money and property before their death.
Limited Gift Tax Exemption
As of 2016, you can give a lifetime total of up to $5.45 million in taxable gifts without having to pay the gift tax. This limit may change from year to year according to rising inflation.
Annual Gift Tax Exclusion
The annual Federal exclusion allows you to give away as much as $14,000 per person without those gifts being taxable or counting against your lifetime exemption.
If you are married, you and your spouse can give up to $28,000 in a year under this exclusion.
Who Pays it?
The donor is responsible for paying this tax. Generally, recipients never owe income tax on gifts.
What is and isn’t a Gift?
Generally speaking, if you aren’t paid back fully for a transfer of property to an individual, it’s a gift.
However, there are several exemptions, including:
- Gifts to a spouse
- Medical or educational expenses
- Gifts to a political organization
- Gifts valued less than the annual exclusion in a tax year
What are the Advantages?
As part of personal financial planning, it’s very common for wealthy older people to give away money and property to their beneficiaries before they die. This financial strategy helps reduce the loss of value of money and property through the payment of estate taxes.
Can I Deduct the Gift?
Although gifts do not normally affect your Federal income tax, you cannot deduct the value of the gift unless they are deductible charitable contributions.
If you have made a sizable, taxable gift this year, you must file a Form 709 by the April 18 tax deadline. You are required to file the document if you have contributed gifts that exceeded the $14,000 annual exclusion level even if you have not reached the $5.45 million lifetime limit.