Many people choose to gift assets to members of their family (or even friends and partners) over the course of their lifetime. Usually, this is part of their financial planning efforts. While it can be a great way to distribute wealth and avoid paying estate taxes, especially after death, it’s important to be aware of regulatory limits to avoid triggering the gift tax exclusion.
Gift taxes raise the amount of money someone owes to the IRS after the maximum lifetime limit is reached. Here’s how gift taxes affect a person’s financial future.
What Counts as a Gift?
The IRS views several assets as “gifts.” These include cash, other gift items, stocks, art, vehicles and land. Basically, anything that has monetary value and is exchanged without receiving the full value in return is considered a gift.
What Happens If the Gift Exceeds the $15,000 Value?
Taxpayers who gift items worth more than $15,000 in value to a single person in a calendar year must file Form 709 with the IRS. They also need to provide transfer documentation and appraisals attesting to the actual value of the items. This form helps the IRS track gifts given over a person’s lifetime to determine when a tax is due.
Are There Any Exceptions to the Gift Tax Rule?
Yes. If a person is paying for another’s medical bills or college tuition, they can avoid triggering the exclusion by paying the facility or college directly. Additionally, gifts made to a spouse or to a political organization or charity are not considered taxable gifts and therefore do not need to be claimed.
How Does Gifting Work With Spouses?
The IRS allows spouses to each gift up to the maximum allowable for the year, effectively doubling the gift tax exclusion. So for 2020, each spouse can gift up to $15,000 for a total of $30,000 per person without triggering the tax. If a married couple gifts a value of over $15,000 for each person, however, each donor will have to fill out a separate Form 709, even if they file their taxes as married filing jointly.
Who Pays the Gift Tax?
The gift tax is almost always paid by the donor, but there are exceptions. Sometimes, the donor wishes to have the donee pay the taxes or the donor passes away before filing their taxes. In this case, the executor of the estate will be responsible for filing Form 709 on the deceased’s behalf.
What Is the Lifetime Exclusion?
Currently, for 2020, the lifetime exclusion is $11.58 million. As long as the lifetime gifts do not exceed this amount, the donor will not have to pay a gift tax.
If you’re curious about how gifting assets will affect your taxes, it’s a good idea to contact a financial expert, such as an estate planner. They can help you navigate the exclusions and determine whether you have to file and/or pay the gift tax.
~Here’s to Your Financial Health!
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