The gift tax, a federal tax on transfers of money or property, can be complex to navigate. Understanding its nuances, such as the annual and lifetime gift tax limits, can help you manage your financial affairs more effectively.
Here we delve into key aspects of the gift tax, from its limits and deductions to practical tips on avoiding unexpected tax obligations.
The gift tax is imposed on transfers of money or property to others, either directly or indirectly, without receiving full value in return. Typically paid by the giver, it involves two factors: the annual gift tax exclusion and the lifetime gift tax exclusion.
The 2024 gift tax limit is $18,000, with married couples having a combined limit of $36,000. Exceeding the annual limit triggers the need for a gift tax return, and any excess contributes to your lifetime exclusion.
There are several situations that can unintentionally trigger the filing of gift tax returns. If you contribute to your grandchild's 529 plan or pay for a family member's wedding in an amount more than the annual gift exclusion, you could potentially need to file a gift tax return.
One of the most common situations that can trigger gift taxes is interest-free loans to family and friends or forgiving those loans entirely.
The estate and gift tax exemptions are $13.61 million per individual for 2024 gifts and deaths. It's best to imagine gifting exclusions as buckets. Any amount over the annual limit spills over into the lifetime exclusions bucket.
| Gift Value | $40,000 |
| 2024 Gift Tax Exemption Limit | $18,000 |
| Taxable Amount | $22,000 |
| 2024 Lifetime Gift Exemption Limit | $13,610,000 |
| Remaining Lifetime Exemption Limit after Gift | $13,588,000 |
For instance, if you pay $40,000 for your child's wedding this year, you will use up your $18,000 annual exclusion. The bad news is that you will need to file a gift tax return. However, the positive news is that you probably won't have to pay a gift tax. Why? Because the additional $22,000 ($40,000 - $18,000) simply counts against your lifetime exclusion.
Remember, any gift tax return that you file keeps track of that lifetime exclusion. This means that if you don't gift anything during your life, you have the whole lifetime exclusion to use against your estate when you die.
There are exceptions to the gift tax rule. The following are not considered taxable gifts:
Taxpayers typically face gift tax only on amounts surpassing their lifetime exclusion. Rates range from 18% to 40%, with exceptions and special rules outlined that can be discussed with your accountant or CPA.
In most cases, receiving gifts or inheritances doesn't trigger federal taxes. However, subsequent income generated by these assets can be taxable. It's essential to consult an expert, like an accountant or CPA, regarding your tax consequences.
The easiest way to avoid filing a gift tax return and possibly paying the gift tax is to ensure you don't unintentionally exceed your annual gift and lifetime gift below the exclusion amounts.
What is the gift tax?
According to the Internal Revenue Service (IRS), the gift tax is accessed on money or property valued above a certain threshold that is transferred to another person without receiving anything in exchange.
What pays the gift tax?
The donor, not the recipient, typically pays the gift tax.
What is the gift tax rate?
The gift tax rates range from 18% to 40%, based on how much your gift exceeds the examples.
How much can I gift my child?
You can gift your child or grandchild the same amount that you can gift other relatives and friends without being subject to the gift tax.
When is the gift tax return due?
It is due on Tax Day after the year you exceeded the annual exclusion.
If you are sending a $20 bill with a birthday card, there is no need to sweat the federal gift tax. However, when dealing with larger sums, you will need to keep track of what you are giving, when you are giving it, and who receives it.
Navigating the complexities of gift tax involves understanding annual and lifetime limits, potential tax rates, and strategies to avoid unexpected tax obligations. If you have questions about how the gift tax works, if you have exceeded it, or how to create a plan to limit your exposure to it, you'll want to speak with your financial advisor.
If you don't have a financial advisor, contact one of our financial planners. They can help you manage your gifts more effectively and make informed choices for your financial future.
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Megan Robinson is the investment coordinator at SDT. With specialized training and her Financial Paraplanner Qualified Professional™ (FPQP™) certification, she has cash management, investment strategies, and retirement planning expertise.
