A gift tax is a federal tax imposed by an individual who gives an item that is valuable to another person without receiving something of comparable value in exchange. Gifts can include anything of substantial value, like huge amounts of real estate or money, and be imposed even when the person who donates it did not intend to make it an offer. IRS establishes limits on the amount you are allowed to give before filing returns and before you're taxed. The amounts that exceed the thresholds each year are taxable and count towards the lifetime gift tax exemption amount.
How a Gift Tax Works
This tax, federally imposed by the IRS, was established to deter taxpayers from giving money and things of value to other people to get away from paying taxes on income. Gift tax laws are imposed to stop unnecessary hardships and obligate recipients and donors to fulfill their tax obligations. Donors must complete the federal tax return for gifts (Form 709) and file it with their tax returns on or before April 15th of the calendar year following the gift was given.
The amount of the tax-deductible gift determines tax rates for gifts. They could range from 18% to 40 percent. Taxes are only charged when annual gifts exceed an amount of a certain value, and any gifts below the amount are exempt from tax. The maximum annual exemption is $15,000 in 2021 and $16,000 in 2022. These limitations are per recipient, meaning you can give multiple gifts that exceed $15,000 or $16,000 to various people without paying the tax on gifts. The lifetime exclusion refers to the total amount you can give. Adjusted annually to account for inflation, this exemption is $11.7 million for 2021. It will be $12.06 million by 2022.
Who Pays the Gift Tax?
Generally speaking, you don't have to worry about paying taxes on gifts you receive from your loved ones. It's the person giving the gift, not its recipient and the person who received it, who must submit a tax return for gifts (Form 709) and possibly be required to pay gift tax. Most of the time, it's quite clear when you make a gift--any moment you transfer something of worth in value from one party to the other. However, there are situations where a person might transfer an item without considering it as an actual gift. For instance, if you give a gift to your child, it is an exchange tax-deductible. The only person you can gift a gift without potential tax implications can be your spouse.
It is also possible to consider something an offer even if it is a part payment made by the recipient. If a couple decides to sell their house to pay their adult son the sum of $250,000. The good part is that plenty of gifts will not be tax-deductible. They include:
- Medical or tuition costs that are paid for by someone else
- Give gifts to your spouse
- Donations to political organizations
- Contributions to charitable organizations
Gift Tax Strategies
Gift Splitting
Marriage lets you increase the number of gifts you give. Remember that the annual exemption applies to the amount one can offer the recipient. This technique is also known as gift splitting. It allows wealthy couples to make large annual gifts to grandchildren, children, and other relatives. This can be in addition to, for instance, tuition paid directly to a grandchild's college or college, which is exempt from taxation on gifts.
Gift in Trust
Donors can make gifts that are more than the annual exclusion and not pay taxes by establishing a specific trust type--the Crummey trust. It is the most common arrangement that allows for the distribution of money. The gift tax exclusion typically doesn't apply to funds distributed through trusts. However, trusts like the Crummey trust can allow beneficiaries to take out the assets over a specific period, for example, 90 days or six months. The beneficiary is granted what the IRS refers to as a gift-day interest in the trust. This type of distribution could qualify as a tax-free gift. However, the beneficiary cannot take out more than an amount equivalent to the gift made by the trust.
Conclusion
It is a Federal levy imposed when you offer to another person or persons, free of charge or cost, cash or tangible or intangible assets with intrinsic value. It is charged to the person who gave it rather than the recipient. The gift tax has been designed, so that very few individuals pay the tax. Many types of gifts are exempt, such as gifts to spouses. Additionally, you can give a sum of eight figures during your lifetime before gift tax becomes triggered. And even the tax is triggered for the amount higher than the threshold.
