“It’s better to give than to receive,” says the old adage. But many people aren’t aware that there could be tax ramifications to giving away money or assets to others.
Looking to improve your overall tax management? Get down to the nitty gritty with our guide 5 Tax Hacks for Investors.
What is Gift Tax?
A federal tax called the gift tax is assessed on transfers of cash or property valued above a certain threshold. Gift tax is paid by the giver of money or assets, not the receiver. The good news is that this threshold is so high that few people end up actually having to pay the gift tax.
If you’re interested in overall reducing your taxable income, here’s an article with an overview of financial gifts, plus 11 more kinds of nontaxable income.
What is the Annual Gift Tax Exclusion?
In 2021, you only have to file a gift tax return and possibly pay the gift tax if you give away cash or property that’s valued at more than $15,000 per year. If you’re married and you and your spouse file a joint income tax return, together you can give away up to $30,000 per year gift-tax free. These amounts are known as the annual gift tax exclusion.
Note that this annual exclusion is per gift recipient. So you could give away $15,000 to several different people in a single year and still not have to file a gift tax return and possibly pay the gift tax. Also, you and your spouse can generally give as much as you like to each other without triggering any gift tax ramifications.
For more on starting small and working your way up to large financial gifts, check out Charitable Giving: How This Family Laddered Up to Their Own Version of 10%, an article by financial podcaster Andy Hill.
What About the Lifetime Gift Tax Exclusion?
The lifetime gift tax exclusion is an additional exclusion amount that’s added to the annual gift tax exclusion. So if you give away more than $15,000 in one year to a single person, the lifetime gift tax exclusion will kick in. Think of these like buckets: If you fill up your annual gift tax exclusion bucket, the excess gift amounts will spill over into your lifetime gift tax exclusion bucket.
The lifetime gift tax exclusion in 2021 is $11.7 million, or $23.4 million if you’re married and you and your spouse file a joint income tax return. If you gave $60,000 to a single person in one year, for example, the $45,000 that’s above your annual exclusion amount would be applied to your lifetime exclusion.
As you can see, you would have to give away a lot of cash and property before you end up having to pay gift tax. However, you will have to file a gift tax return if you give away more than your annual gift tax exclusion in any one year. This return is used to help you and the IRS keep track of your lifetime gift tax exclusion.
How Can You Avoid Gift Tax?
If you do end up exceeding the annual and lifetime gift tax exclusion amounts, the gift tax rate you’ll pay will range from 18% to 40% in 2021, depending on the value of the gift in excess of these exclusions. And remember: If you exceed your annual exclusion, you’ll have to file a gift tax return Form 709 with the IRS along with your income tax return. The gift tax return is due April 15th after the year you exceeded the annual exclusion. If you receive gifts over $100,000 from a nonresident alien or foreign estate you will need to file Form 3520 to report the receipt of the foreign gift. The filing deadline for Form 3520 is also April 15th following the year of the receipt of the foreign gifts over $100,000.
To avoid having to file a gift tax return and possibly even pay the gift tax, be careful that you don’t inadvertently exceed your annual gift tax exclusion in any one year. For example, suppose you want to help pay for your grandkids’ college expenses so you contribute $20,000 to each of their 529 college savings plans. You’ll now have to file a gift tax return reporting these gifts.
Or maybe you decide to pay for your child’s wedding or foot the bill for their honeymoon. These would each be considered gifts, so if you spend more than $15,000 on either of them, you’ll have to file a gift tax return.
The details of gift tax planning can be complex, so be sure to consult with a tax professional for advice and guidance in your specific situation.
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Personal Capital compensates Brian E. Leyde (“Author”) for providing the content contained in this blog post. The information and content provided herein is general in nature and is for informational purposes only. Individuals should contact their own professional tax advisors or other professionals to help answer questions about specific situations or needs prior to taking action based on this information. Tax laws and authorities are subject to change, either prospectively or retroactively, and any subsequent change could have a material impact on your situation.