If you have ever offered or received a gift, you are bound by certain tax norms. Yes, the IRS imposes a tax on gifts. The Gift Tax was introduced to prevent taxpayers from sidestepping over Estate Tax by gifting all their money and property to family or relatives before their death. 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.”
Usually, paying the Gift Tax is the responsibility of the donor, that is, the person who is giving the gift. However, under special circumstances, the donee or the receiver of the gift may also be subject to paying the gift tax. While as a general rule all gifts are considered to be taxable, there are certain exceptions too:
- Gifts that do not exceed the annual exclusion limit for a particular calendar year.
- Gifts that are given to your spouse.
- Gifts that are given to political organizations.
Also, if you pay someone’s tuition or medical expenses, it is exempted from the Gift Tax. However, to qualify for the exclusion, the payment has to be made directly to a qualifying educational organization or medical care provider. Or you could also opt to pay directly into a 529 education savings plan.
Another important exception is promotional gifts. According to IRS’ definition of gift, something is only considered as a gift when the donor doesn’t receive anything in return. But let’s say, you’re a businessman and you give away a certain product of your brand as gifts to people for promoting your brand name. So, these gifts are fetching you publicity and exposure in return, and hence, they are not eligible for the Gift Tax.
The Annual Exclusion
As of 2018, the annual exclusion for the Gift Tax stands at $15,000 per person which means that each individual can gift up to $ 15,000 worth of tax-free gifts in a particular calendar year. Apart from the annual exclusion, there’s also another option for taxpayers – lifetime exemption. But of course, there’s a catch. To avail the lifetime exemption, you’d have to give away more than the amount (money or physical assets) you’re allowed to gift during the course of your life. As of 2018, this amount stands at $11.18 million. The good thing is that the annual exclusion is independent of the lifetime exemption which is applicable only and if you’ve gifted beyond the annual exclusion limit in a tax year.
Since the annual exclusion permits each individual to gift up to $15,000 worth of gifts, married couples enjoy an added benefit here as the combined limit reaches $30,000. For instance, you and your spouse want to gift a house to your son/daughter, you can make a downpayment for the house with a cheque for $30,000 without having to pay the Gift Tax.
The Unified Tax Credit
Under the Unified Tax Credit, the Gift Tax and the Estate Tax enjoy the same exemption ceiling of $11.18 million. On the event of your death, the IRS clubs together all the gifts and bequests you make from your estate in the entire course of your life and applies the overages to your lifetime exemption. If the excess gift amount plus the total value of your estate exceed the lifetime exemption amount ($11.18 million), you may be subject to 40% federal Gift Tax.
How To File A Gift Tax Return
Gifts that exceed the annual exclusion ceiling must be reported to the IRS on Form 709. This form will record by how much you’ve exceeded your annual exclusion in each tax year and the excess amount will be included in your lifetime exemption amount.
So, plan your gifts carefully!
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