Which Gifts Are Taxable & What Can Be Excluded
Have you given or received a large gift? Do you know what the tax consequences are? You may be subject to the 40% Federal Gift Tax.
According to the IRS, a gift is “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”
The Gift Tax is the responsibility of the person who gives a gift (i.e. the donor), and the amount of tax due is based on the value of their gift. The person who receives a gift (i.e. the donee) is generally not responsible for paying the Gift Tax. However, if the donor does not pay the Gift Tax, the donee may be liable. In some situations, the donee may agree to pay the Gift Tax instead.
The Gift Tax was implemented in order to stop people from dodging the Estate Tax by giving away all of their money before death. While most individuals don’t need to worry about having to pay the Gift Tax, there are a lot of people who neglect to file the proper paperwork.
Here are 7 things you should know about the Federal Gift Tax:
1. There Is an Annual Exclusion
Gift Tax rates range from 18% to 40%. You do not have to pay tax on gifts that are below the annual exclusion limit, which generally changes every year. For tax years 2018 and 2019, the annual exclusion is $15,000 per recipient. In other words, you can give up to $15,000 to each of your children this year without having to pay any Gift Tax. (The annual exclusion was $14,000 for tax years 2014, 2015, 2016, and 2017.)
2. There Is a Lifetime Exclusion
This refers to the total amount that an individual can give away during their entire lifetime. If your gift exceeds the $15,000 annual threshold, it must be reported as a taxable gift on IRS Form 709 (United States Gift Tax Return) — however, that doesn’t necessarily mean you’ll have to pay tax on it right away. Instead, you can apply the gift towards your lifetime exclusion from the Federal Estate Tax.
The “basic exclusion” (also known as the “unified credit”) represents both the lifetime Gift Tax exclusion and the Estate Tax exclusion, signified as a total amount of $11,180,000 – that’s over $11 million per person.
But keep in mind, any portion that’s used to avoid the Gift Tax reduces the amount that will be exempt from Estate Tax. For example, if you gave taxable gifts during your lifetime that exceed the annual thresholds by $4 million, that will be deducted from your lifetime exclusion, which will reduce it to $7,180,000. That means you’ll only be allowed to exclude $7.18 million from the Estate Tax – so if your estate is greater than the $7,180,000 limit, you (or your heirs) will have to pay up to 40% tax.
You can give someone $15,000 per year and it won’t affect your lifetime exclusion because gifts below the annual threshold are not considered taxable. If you exceed the $15,000 annual Gift Tax threshold, you must file Form 709 and report the amount that counts against your lifetime exclusion. You should also hold onto any relevant paperwork so your heirs can properly compute the Estate Tax later.
3. There Are Also Educational & Medical Exclusions
Payments that you make on someone’s behalf for qualified tuition or medical expenses are exempt and do not count towards the annual limit for Gift Tax purposes. However, your payment(s) must be made directly to a qualifying educational organization or medical care provider in order to qualify for this exclusion. You may be able to place funds directly into a 529 College Savings Plan to avoid the Gift Tax — but note that certain rules apply. See the Instructions for IRS Form 709 for more information.
RELATED: Education Tax Breaks for Your Federal Return
4. Gifts to Family Members Count
The Gift Tax exclusion limits (for both annual and lifetime) apply whether you are making the gift to a complete stranger, a nephew, or your own children. The only person you can give a gift to that is exempt from the Gift Tax is your spouse. Gifts to your spouse qualify for the marital deduction and are not subject to the Gift Tax.
5. Married Couples Can Give Twice As Much
Spouses can each give up to $15,000 to the same recipient and still stay within the annual exclusion threshold. Together, a married couple can give $30,000 to each donee without incurring the Gift Tax. Most tax professionals recommend that married couples give money in the form of two separate checks, each signed by one of the spouses, to avoid any confusion.
RELATED: How Getting Married Affects Your Taxes
6. You May Need to File a Gift Tax Return (IRS Form 709)
In general, you must file a Federal Gift Tax Return (IRS Form 709) if you gave someone more than $15,000 during the year. In some cases, you are required to file Form 709 even if your gift was below the $15,000 annual exclusion. Note that only individuals are responsible for filing gift tax returns — corporations or trusts that make gifts will pass the filing and payment responsibilities onto their individual stockholders or beneficiaries. Additionally, a married couple cannot file a joint gift tax return.
Form 709 is an annual return that is due by April 15 (in the year after the gift was made). While this is the same deadline as the individual income tax return (IRS Form 1040), the gift tax return must be filed separately. You can request a 6-month filing extension for your gift tax return with IRS Form 8892. Furthermore, if you use IRS Form 4868 to obtain a tax extension for your 1040 return, you will automatically receive an extension for your Form 709 gift tax return.
Here are the links for Gift Tax forms:
- IRS Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return
- Instructions for Form 709
- IRS Form 8892 (Application for Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax)
- IRS Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return)
7. Promotional Gifts Aren’t Considered “Gifts”
If you receive a gift as part of a promotion — for example, a car is given away to every member of the studio audience — then it does not count as a “gift” by IRS standards because the giver is getting something in return, namely self-promotion. This means that the tax burden for a promotional gift falls on the recipient (because it increases their wealth) and is not eligible for the annual Gift Tax exclusion.
RELATED: Taxable vs. Non-Taxable Income