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One important component of estate planning is making provisions to pay any gift taxes that may be assessed by the IRS on cash or assets you transfer or bequeath to others. Since the tax burden in these situations falls on the person receiving the gift, rather than the person providing the gift. Thus, failure to adequately account for your liability to the government could impact your estate in unforeseen ways. To help you understand the gift tax better, our accountants are breaking down what you need to know to avoid mistakes and keep the IRS from getting a sizable portion.
Understanding the Gift Tax
Some of the most noteworthy parts of current IRS guidelines include the following:
- The annual gift tax exclusion allows individuals to give up to $15,000 tax-free to a single recipient.
- Spouses are entitled to the same annual gift tax exclusion benefit for a combined total of $30,000 to a single recipient (called a "split gift").
- The annual gift tax exclusion applies to an unlimited number of recipient.
- The lifetime gift tax exemption allows you to give up to $11.58 million over the course of your life without having to pay a tax. Married couples each get $11.58 million exemption, so a couple can give away $23.16 million before paying a tax.
- Widows and widowers may claim any unused portion of the lifetime gift tax exclusion of their deceased spouse to raise the exemption to a maximum of $10.68 million
- Transfers in excess of either the annual gift tax exclusion or the lifetime gift tax exclusion are subject to a maximum tax rate of 40%
- Donors are generally not required to file a Form 709 (gift tax return) for transfers that fall under the annual exclusion
- Form 709 is required for transfers or gifts that count against the lifetime exemption or for any split gifts made during the tax year
Let's look at an example. Say you want to give your niece an annual gift of $20,000. The first $15,000 is not taxable because it would fall under the yearly exclusion, but the remaining $5,000 would count against your lifetime gift tax exemption, cutting into the $11.48 million. Anything after that would be taxed in accordance with federal estate taxes.
Gifts That Are Not Taxable
Not all gifts are considered taxable, including:
- Donations to charities approved by the IRS,
- A gift to your spouse, assuming he or she is a U.S. citizen;
- A gift to pay for tuition, assuming the money covers only tuition (not room and board, books, or supplies) and is paid directly to the institution;
- Donating to a political organization;
- Gifts to cover medical expenses, if the gift is paid directly to the medical facility (Like sending a payment directly to a hospital to cover a bill);
Not only do you not need to report these to the IRS to apply toward the gift tax, any gifts to a qualifying charity can be deducted from the total amount you gifted.
Contact a Raleigh CPA for Tax Planning
Remember, these are just general guidelines that may or may not apply to your own situation. To learn more about tax planning, reach out to our CPAs in Raleigh today to set up an appointment by calling us at 919-420-0092 or fill out our contact form.