Understanding Gift Tax and the Corresponding Exclusions
A gift tax is a federal tax type where you transfer or give properties or assets, including money, to another person. However, you are not expecting to receive anything in return — at least not in the full value of the gift given. You can also consider an item as a gift if you did not receive any interest or if it sells less than its absolute value.
Understanding gift taxes
Now, are you obliged to pay a gift tax if you receive a gift? No, since gifts or inheritance are not taxable unless they generate income such apartments and businesses. Also, the giver of the gift is the one obliged to pay the gift tax.
Avoiding gift tax
To avoid gift taxes, one must take note of two certain limits. One is 2020 and 2021’s annual exclusion that amounts to $15,000. Second is the lifetime exclusion that amounts to $11.58 million in 2020 and $11.7 million in 2021.
Annual exclusion explained
Let us explain how annual exclusion works. A gift should not exceed $15,000 in total for the whole year in 2020 and 2021. If ever you exceed $15000, you won’t have to pay a gift tax. However, you should file for IRS Form 709 or a gift tax return to make the gift known. Once you already gave a gift of $15,000, you can still give $15,000 to other people since this exclusion does not add up all of your gifts. It is per recipient. The receiver does not need to report anything to the IRS.
The annual exclusion is per person as well, which means you can give a combination of $30,000 in a year without the need to file a gift tax return together with your spouse if you are a married person. And speaking of being married, you can exchange unlimited gifts with your spouse.
Lifetime exclusion explained
On the other hand, lifetime exclusion is the total of all the gifts you gave in your life. The gift tax returns that you filed keeps track of this. In 2020, the lifetime exclusion amounted to $11.58 million, which goes up to $11.7 million in 2021. If you are married, the exclusion now becomes doubled. For example, if you give Mr. A $100,000, you need to file a gift tax return since you exceeded $15,000, but you will not need to pay a gift tax. Why? The amount of the lifetime exclusion mentioned earlier is way higher than $100,000, let alone $75,000 ($100,000 – $15,000).
If you are that fond of gift-giving that you exceeded the annual and even the lifetime exclusions, you need to pay a gift tax that ranges from 18% to 40%. Internal Revenue Service’s Form 709 explains all the details in full.
The gift tax rule also gives exemption to some gifts. Some examples include gifts for the use of political organizations, gifts for US citizen spouses, gifts below $15,000, charitable donations, medical expenses, and school expenses.