Which Gifts Are Taxable And What Can Be Excluded?
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 have to pay the 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:
- Gifts to Family Members Count
The gift tax and exclusion limit (below) 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.
- There Is an Annual Gift Tax Exclusion
You do not have to pay tax on gifts that are less than the annual exclusion limit, which generally changes every year. Currently, the annual exclusion is $14,000 per recipient. In other words, you can give up to $14,000 to each of your children this year without having to pay any gift tax.
- There Are Also Educational and Medical Exclusions
Payments that you make on someone’s behalf for qualified tuition or medical expenses 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 the exclusion. You can also place funds directly into a 529 education savings plan to avoid the gift tax — but note that certain rules apply.
- You May Need to File a Gift Tax Return (Form 709)
In general, you must file a Federal gift tax return (IRS Form 709) if you gave someone more than $14,000 during the year. In some cases, you are required to file Form 709 even if your gift was below the $14,000 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 of the year after the gift was made. While this is the same deadline as the individual income tax return (Form 1040), the gift tax return must be filed separately. You can request a 6-month filing extension for your gift tax return with Form 8892 (Application for Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax). Furthermore, if you use Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) to obtain a tax extension for your 1040 return, you will automatically receive an extension for Form 709.
- Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return
- Instructions for Form 709
- Married Couples Can Give Twice As Much
Spouses can each give up to $14,000 to the same recipient and still stay within the annual exclusion threshold. Together, a married couple can give $28,000 to each donee without incurring the gift tax. Most tax professionals recommend that married couples give money in the form of 2 separate checks, each signed by one of the spouses, to avoid any confusion.
- Each Donor Has a Lifetime Exemption
This refers to the total amount that an individual can give away during their entire lifetime. If your gift exceeds the $14,000 annual threshold, it must be reported as a taxable gift on Form 709 — however, that doesn’t necessarily mean you’ll have to pay the gift tax. 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 exemption and the estate tax exclusion, signified as a total amount of $5.34 million. The current law allows individuals to give away up to $5.34 million over their lifetime without having to pay gift or estate taxes.
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 used $2 million of the exemption to make taxable gifts during your lifetime, you will only be able to exclude $3.34 million from the estate tax. If you surpass the $5.34 million limit, you (or your heirs) will have to pay up to 40% tax.
You can give someone $14,000 per year and it won’t affect your lifetime exemption (because gifts below the annual threshold are not considered taxable). If you exceed the $14,000 annual gift tax threshold, you must file Form 709 and report the amount that counts against your lifetime exemption. You should also hold onto any relevant paperwork so your heirs can properly compute the estate tax later.
- 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.