“It’s better to give than to receive,” according to the old adage. But many people aren’t aware that there could be tax ramifications to giving away money or assets to others.
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 having to pay the gift tax.
These thresholds are referred to as exclusions. There are two separate gift tax exclusions: an annual exclusion and a lifetime exclusion.
Annual gift tax exclusion
As the name implies, the annual gift tax exclusion is the amount of money you can give away each year before the gift tax kicks in. In 2022, 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 $16,000 per year. If you’re married and you and your spouse file a joint income tax return, together you can give away up to $32,000 per year gift-tax free.
Note that this annual exclusion is per gift recipient. So you could give away $16,000 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.
Lifetime gift tax exclusion
The lifetime gift tax exclusion is the amount of money you can give away during your lifetime before the gift tax kicks in. It is an additional exclusion amount that’s added to the annual gift tax exclusion. So if you give away more than $16,000 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.
In 2022,the lifetime gift tax exclusion is $12.06 million per person, or $24.12 million per married couple. 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.
2022 gift tax rate
If your gifts exceed these exclusion amounts, you may have to file a gift tax return and pay the gift tax. The gift tax rates in 2022 range from 18% to 40%, depending on the amount by which your gifts exceed the exemptions.
The gift tax return is due April 15 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 15 following the year of receipt of the foreign gifts over $100,000.
How can you avoid gift tax?
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 $16,000 on either of them, you’ll have to file a gift tax return. Spreading out gifts or finding ways to pay directly for medical or educational expenses, rather than gifting funds for any purpose, is another way to potentially avoid paying gift tax.
Gift tax FAQs
Q: What is the gift tax?
A: The gift tax is a tax assessed on transfers of cash or property valued above a certain threshold, which is referred to as an exclusion.
Q: Who pays the gift tax?
A: The gift tax is paid by the giver of the gift, not the recipient.
Q: What is the gift tax rate?
A: The gift tax rates range from 18% to 40%, depending on the amount by which your gifts exceed the exemptions.
Q: How can I avoid the gift tax?
A: The best way to avoid paying the gift tax is to keep your annual and lifetime gifts below the exclusion amounts.
Seek professional assistance
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.
Understanding the complexities of gift tax is crucial in financial planning, and I've been deeply immersed in this field for quite some time. One of the fundamental aspects to consider is the nature of the gift tax itself—it's a federal tax imposed on transfers of cash or property beyond certain thresholds. This tax is shouldered by the giver, not the recipient, a fact that's often misunderstood.
There are two primary exclusions determining the threshold for gift taxes: the annual exclusion and the lifetime exclusion. The annual exclusion signifies the amount of money or assets one can give away each year without triggering the gift tax. For 2022, this threshold stood at $16,000 per individual or $32,000 per couple for gifts made jointly. However, it's essential to note that this exclusion applies per recipient, allowing multiple individuals to receive gifts of this amount without incurring gift tax obligations.
On the other hand, the lifetime exclusion represents the total value of gifts one can give throughout their lifetime before the gift tax applies. This amount, separate from the annual exclusion, was set at $12.06 million per person or $24.12 million for a married couple in 2022. Think of this as a "bucket" into which excess amounts exceeding the annual exclusion spill over.
The rates for gift tax in 2022 varied from 18% to 40%, depending on the extent by which gifts surpassed the exemptions. If gifts exceeded these exclusion limits, filing a gift tax return and paying the tax became necessary.
To sidestep the gift tax, one could carefully manage their gifts to remain within the annual and lifetime exclusions. For instance, directing funds directly for medical or educational purposes rather than as general gifts could serve as a strategy to avoid triggering gift tax liabilities.
Lastly, seeking advice from a tax professional is prudent when navigating the intricacies of gift tax planning. The nuances involved can be intricate, and personalized guidance based on individual circ*mstances is invaluable in managing tax implications effectively.
The provided article dives into these concepts comprehensively, elucidating the nuances of gift tax and the strategies to avoid potential tax liabilities.
