This past year, did you buy a new car for your business partner or pay college tuition for your favorite waitress? If so, you’ll face some tax implications — and it’s not only for the mega-rich, either. Let Benzinga provide some clarity on gift tax limits
What are the Gift Tax Limits for 2020?
For the tax year 2020, the Internal Revenue Service has set the official annual gift tax exclusion limit at $15,000 per person. The annual gift tax exclusion limit for gifts to a non-U.S. citizen spouse is $157,000. When you gift money over the annual gift tax exclusion limit, the government subtracts the excess from your lifetime gift tax limit. You can prevent this overage from affecting your lifetime gift tax limit by paying the tax on that amount.
The IRS recently raised the lifetime gift tax limit from $11.4 million to $11.58 million per individual donor. This means you can give your heirs $11.58 million without paying a gift tax. It doesn’t matter whether you award it over the span of your life or will it to them as part of their inheritance. Married couples have a gift tax limit of $23.13 million.
What is the Gift Tax?
The IRS considers any one-way transfer of money or property to be a gift. Let’s say you quick-deed your summer home to your best friend without receiving any payment. The U.S. government classifies this transfer as a gift.
On the other hand, if you sell your summer home to your friend for less than its fair market value, the difference between the 2 transactions is also a gift by IRS standards. This table breaks it down:
|Type of Asset||Fair Market Value||Actual Payment||Amount Subject to Gift Tax|
The IRS definition of fair market value is the price a willing buyer and a willing seller would agree upon for a duress-free exchange of the property. This definition also applies to an interest-free loan to a person or institution. A good financial advisor or CPA can help you get a good fair market value estimate on your property. Adding an adult child as a joint owner on your bank account is also a taxable gift.
How Does the Gift Tax Annual Exclusion Work?
The gift tax annual exclusion can give you a tax break in several ways. Each year, the IRS allows you to give up to $15,000 per person. This means you can give that amount of money to as many people as you like without assuming a tax burden. If you wanted to help fund your friend’s startup, you could contribute $15,000 to each member of the founding group. Ten members could result in a gift-tax free donation of $150,000.
For married couples, each spouse has a $15,000 exclusion. You and your spouse could give $30,000 per person without paying a gift tax. Technically, you and your spouse could give your son, daughter-in-law and grandchild a tax-free gift of $90,000. It would break down this way:
Your tax-free gift total would be $90,000.
What is Safe from the Gift Tax?
Generally, the IRS regards every gift as taxable, but there are many exceptions. These gifts are usually not taxable:
- Gifts to your spouse
- Medical expenses
- Gift for use by a political organization
- Tuition for educational purposes
- Gifts to qualifying charities
- Gifts under the annual exclusion limit
So if you plan on gifting any of the above in the coming year, you will be safe from the gift tax.
How to Pay the Gift Tax?
The IRS requires you to report any gifts over the annual gift tax exclusion limit on Form 709, the United States Gift (and Generational Skipping) Tax Return. This form serves as a yearly record of the overage amounts of the annual gift tax exclusion. These overages reduce your lifetime exemption.
You can handle the gift limit excess in 2 ways:
- Let it count against your lifetime exclusion and pay nothing until you exceed $11.58 million in gifts.
- Prevent the overage from counting against your lifetime exemption by paying the 40% tax. In other words, you are not liable for any gift taxes until you exceed the lifetime tax exclusion. But, you can avoid future problems by keeping clear and accurate records of your gifts by filing Form 709.
How to Get Help with Gift Taxes?
Determining fair market value and filing the proper paperwork typically calls for the help of a financial professional. Consider these 3 factors:
- Size of the transfer
- Complexity of the transfer
- Type of professional
You won’t need any professional assistance with simple transfers under the annual gift tax exclusion limit. Seek professional guidance for your large, complicated transactions. You’ll need an attorney for trusts, wills and transfer documents. A certified public accountant can oversee the tax return. You may be able to find attorneys who handle the whole process. Start your search for the right professional by asking for referrals from friends or you can try some online attorney and CPA locators.
Use a Financial Advisor
A financial advisor can help you navigate the unique complexities with the taxes associated with a large gift. There are several ways to find a financial advisor:
- SmartAsset’s tool: Use this free tool to be matched with upwards of 3 financial advisors in your area
- National Association of Personal Financial Advisors: A large portion of fee-only financial advisors work with the NAPFA, an association focused on the fee-only model. You can use the site’s search function to discover planners in your area at napfa.org.
- Online finance outlets: The internet has a host of options to choose from when it comes to finding resources on financial consultants. Check out Benzinga’s section dedicated to financial advisors and personal finance.
Benzinga also is a resource for finding a financial advisor. Find a the top financial advisor firms in your city:
Financial Advisors Near You
Gift Tax vs. Estate Tax?
The federal estate tax pertains to the transfer of assets at death. The gift tax pertains to the transfer of assets during a person’s lifetime. To streamline the process, the IRS has squeezed these 2 taxes into a single category, called the unified tax credit. The federal estate tax and the gift tax share the same tax exclusion — $11.58 million.
The IRS determines your unified tax credit at death by subtracting your annual overages from your lifetime tax exclusion. To avoid the 40% lifetime gift tax, your estate’s value has to be below the remaining total of your lifetime exclusion. Here’s an example:
|Lifetime Exemption||Total Annual Gift Tax Overages||Adjusted Lifetime Exclusion||Value of Your Estate||Gifts Subject to 40% Tax|
|$11.58 Million||$2.15 Million||$9.43 Million||$8.41 Million||$0|
Think Through Gift Tax Limits
The present federal tax laws allow you to do a lot of gift-giving without suffering any tax liability. But keeping poor gift records could hold up the execution of your estate. Report your annual gifts to help smooth the transition of your assets to your heirs.