Gift giving is a wonderful way to show loved ones that we care, but it’s important to understand how gift taxes work to avoid any unwanted surprises. In this article, we’ll explore the different gift tax laws in the United States and how they impact the amount of gift money that is tax-free.
Explanation of Gift Tax Laws
Gift tax is a tax a person pays on the transfer of property and money to another person without receiving anything in return. The person receiving the gift does not pay taxes on the gift. The Internal Revenue Service (IRS) defines gift tax as a way to prevent individuals from avoiding estate tax by giving away their assets before they die. The annual gift tax exclusion amount is the amount that a taxpayer can gift to another person without incurring any gift tax. Currently, this amount is $15,000 per person per year.
Additionally, there is a lifetime gift tax exemption, which is set at $11.58 million as of 2020. This means that an individual can gift up to $11.58 million over their lifetime without being subject to gift tax. However, gifts that exceed the annual exclusion amount are counted towards the lifetime gift tax exemption.
If an individual exceeds the lifetime gift tax exemption, they will be subject to gift tax. The gift tax rate is 40% and is assessed on the amount that exceeds the annual exclusion amount or lifetime exemption.
Why Gift Taxes Matter
It is important to comply with gift tax laws to avoid the consequences of non-compliance. Non-compliance can lead to audits, civil and criminal penalties, and interest on unpaid tax. Without proper documentation and tracking of gift giving, it can be difficult to determine exactly how much individuals have given and how much more they can give tax-free.
How to Calculate Gift Tax
Calculating gift tax can be confusing, but it’s important to understand to ensure that you are in compliance with tax laws. Let’s say an individual gave a gift of $25,000 to a friend. For this example, the annual exclusion amount is $15,000. Therefore, the gift giver would owe gift tax on the $10,000 that exceeds the annual exclusion amount.
The gift tax owed on the $10,000 would be $4,000, which is 40% of the amount that exceeds the annual exclusion amount of $15,000. In this example, the gift tax owed would be $4,000.
It is also important to note that gift tax is paid by the gift giver, not the recipient of the gift.
Gifts Between Spouses
Gifts between spouses are generally tax-free. The annual exclusion amount of $15,000 per person can be doubled to $30,000 if the gift is made from one spouse to another. Additionally, spouses have an unlimited gift tax exemption which means they can gift any amount to each other without being subject to gift tax.
However, estate tax laws should be considered for individuals with high net worth as gifts between spouses can impact the total value of the estate.
Gifts to Charity
Gifts made to charitable organizations can be tax-deductible. The IRS allows taxpayers to deduct charitable gifts from their taxable income, up to a certain percentage of their adjusted gross income. This limit varies depending on the type of gift and the organization it is given to.
Additionally, gifts made to certain organizations, such as churches and nonprofit educational organizations, are considered tax-free gifts. This means they do not count towards the annual exclusion amount or lifetime gift tax exemption.
Gifts to Family Members
Gifts made to family members may be subject to gift tax, depending on the amount given and the relationship between the giver and recipient.
Gifts made to grandparents, siblings, and children are generally subject to the same annual exclusion amount of $15,000 as gifts made to non-family members. However, there are additional gift tax laws that apply to gifts made to children. If the gift is made to a minor, the gift will be subject to the “kiddie tax” rules which can be quite complex.
Gifts made to parents, aunts, and uncles are subject to the same lifetime gift tax exemption and annual exclusion amount as gifts made to non-family members.
There are certain circumstances where special tax laws and exemptions apply. For example, gifts made for medical or educational expenses are subject to a higher annual exclusion amount of $15,000 per year per recipient, but there is no limit on the number of recipients that can receive this type of gift.
Additionally, gifts made to spouses who are not United States citizens are subject to special rules and exemptions which can vary depending on the year and the tax treaty between the United States and the individual’s home country.
Gift giving is an important part of our culture. However, it is important to understand how gift taxes work to ensure compliance with tax laws. Keeping track of gifts given and understanding the different rules and exemptions for gifts made to different individuals and organizations can be complex. However, following these rules can help avoid any unwanted tax consequences and maximize tax savings.