What’s a Gift? How Are Gifts Taxed? How Do Givers Gain?
The Tax Cuts and Jobs Act (TCJA) became the law of the land in December 2017 with major changes to the tax code … including the taxation of gifts. In this issue of The Blair Bulletin, we’ll recap the 4 key points as they exist today in making gifts:
1. What does the IRS recognize as a gift?
2. What are the gift tax rules?
3. Who pays gift taxes?
4. How do givers gain?
Note: All the following refers to federal gift tax rules. There is no Virginia Gift Tax.
What’s a Gift?
The IRS defines a gift as the transfer of money, property or other assets by one individual to another while receiving nothing, or less than full value, in return. Any type of property may be considered a gift to recipients.
• Use of or income from property
• New car
• Sale of something at less than its full value
• Interest-free or below-market interest loan
The value of completed gifts, that exceed excludable amounts, may result in a gift tax. More on that in a bit.
Note: A gift is completed when the donor no longer has “dominion and control” over it. Making a completed gift forfeits asset ownership and control by the donor.
Gift Tax Exclusions
There are two time-lines affected by gift tax exclusions: annual and lifetime.
Annual Gifting Limits
This year, 2021, the TCJA permits single taxpayers to make annual tax-free gifts of $15,000 per recipient. The IRS takes no notice for gifts of less than $15,000 in a calendar year.
In contrast, the IRS considers a gift made by a married couple from joint property to be given half from each spouse … often referred to as “gift-splitting”. Notably, that means married couples enjoy an exclusion of $30,000 annually per recipient.
Please note the emphasis on per recipient ... not the sum-total of all your gifts. That means that a donor can give anyone … such as a relative, friend or even a stranger … up to $15,000 in assets a year, free of federal gift taxes. Likewise, a married couple could give away $30,000 annually to each of an unlimited number of recipients.
If you give more than $15,000 ($30,00 for married couples) in a year to any one person, you need to file a gift tax return. That doesn’t mean you have to pay a gift tax. It just means you need to file IRS Form 709 to disclose the gift.
Additionally, gifts to pay tuition or medical expenses are also free of gift tax. To qualify for this break, the donor must make the payment directly to the institution
Note: Donations made to a personal GoFundMe fundraiser, rather than a charity fundraiser, are generally considered to be personal gifts and are not deductible charitable contributions. To learn whether your donation is to a Certified Charity Fundraiser, visit the GoFundMe fundraiser page to see if the charity is listed next to the name of the organizer.
Lifetime Gifting Limits
The federal tax law provides for a lifetime gifting exclusion which sets the dollar limit of what you may gift during your lifetime. Again, the recipient or recipients are your choice.
Married couples enjoy a lifetime tax-free gift limit of $11.7 million per recipient … $23.4 million combined.
Note: Gifts made that exceed the Annual Gifting Limits are subtracted from the donor’s Lifetime Gift exclusions.
At the time TCJA became the law, the above tax exclusions were to remain as stated for tax years 2018 through 2025 … at which time the exclusions would revert to pre-2018 levels (indexed for inflation), unless otherwise revised by Congress.
Important! There was considerable taxpayer anxiety expressed by the potential for future tax liability following tax year 2025. In response to those concerns, on November 26, 2019, the IRS clarified that taxpayers taking advantage of the increased gift tax exclusion in effect from 2018 to 2025 will not be adversely impacted after 2025 … even if Congress acts to reverse the current “sunset” provision.
Who Pays Gift Tax … Donor or Recipient?
The short answer to “who pays the gift tax” is very few taxpayers or their estates. As you’ve seen from the exclusion discussion above, gift tax is only an issue for individuals that plan to gift very large amounts over their lifetime or will have big estates when they pass away. The reason … the gift tax exclusion is calculated on cumulative gift amounts upon the death of the donor. Given the significant lifetime exclusion limits, the vast majority of Americans and their estates will never be faced with paying this tax.
Filing the gift tax return, IRS Form 709, discloses excesses of annual gifting limits. So, if you don’t gift anything in your life and don’t exceed the lifetime gifting limits, your whole lifetime exemption will apply against your estate when you die.
The person receiving the gift usually doesn't need to report the gift. If you are a donor who is financially able and generous enough to use up your exclusions, you may indeed have to pay the gift tax … rates range from 18% to 40%.
The federal gift-tax exemption applies to the total of an individual’s taxable gifts made during life. Both the Annual and Lifetime Gifting Limits are substantial. The result is that relatively few American taxpayers are likely to exceed these amounts and be subject to the gift tax. That said, making gifts that don’t exceed the Gifting Limits can yield substantial estate tax savings … particularly if you keep at it for several years.
Note: There is a proposed bill inching through Congress that, if passed as currently crafted, would halve the Gift Tax exclusion amounts. Best guess is that it’s unlikely to pass without revisions and without an impact on 2021. If the revised Gift Tax exclusion were to pass as written, there will be no “clawback” for use of the current exclusion amounts if the donor passes away at a time when the applicable exclusion amounts have been reduced.
On a related issue, estate planning, you may find this Blair Bulletin article valuable … whether you currently have a formal estate plan in place or should consider creating one.
If you have a “thirst for knowledge”, Click Here for more gift tax details from the IRS.
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