Every so often, the words "Internal Revenue Service" and "taxes" evoke trepidation in the hearts of many. With the IRS monitoring all income forms for tax purposes, it might be surprising to learn that there's a tax associated with gifting. However, gifts aren't treated as income. Rather, the onus of paying the tax falls on the giver, not the recipient. So, if you've ever wondered why birthday or holiday money doesn't make it to the taxman, here's a closer look into the nuances of gift tax and clever strategies to manage it efficiently.
Birthday presents or similar occasional gifts often don't attract gift tax because they don't surpass the allowable limit set by the IRS. Many Americans go through life without ever paying this tax due to these allowances. However, in certain scenarios, gift taxes are applicable. Let’s delve deeper into understanding the circumstances and smart moves to remain tax-efficient.
Central to the gift tax universe is the "Lifetime Gift Tax Exclusion". As of 2023, this stands at a whopping $12.92 million. What this means is that throughout one's life, an individual can give away gifts cumulatively valued up to this amount without fretting about gift taxes. Moreover, this credit can be a savior during estate planning, as it can offset estate taxes posthumously.
In 2023, you can gift up to $17,000 to as many people as you desire without attracting the gift tax. Go beyond this per recipient, and you'd need to file a gift tax return. However, taxes might still not be owed. It's a nuance game - remain below $17,000, and you're totally in the clear; surpass it, and while you might not owe taxes, some documentation would be in order.
Remember the $12.92 million limit? It's there to shield you from taxes. But, should you gift above this in your lifetime, tax implications arise. This exclusion is unified - used against gifts now or your estate later. For instance, if you use $5 million now for gifts, upon your demise, you'll have $7.92 million remaining to offset estate taxes.
Here's a savvy trick: break up larger gifts over a couple of years to fit within the annual limit. Suppose Sarah wants to gift Lisa, her niece, $25,000. By gifting $12,500 this year and the balance next year, Sarah seamlessly evades the gift tax.
Gift tax laws view spouses as separate entities. This means a couple can collectively gift up to $34,000 to a person in a year, and when gifting to another married couple, this can go up to $68,000, keeping all transactions within the tax-free zone.
Both medical and educational gifts have a special place in gift tax laws. Money directly given to medical or educational institutions on behalf of someone is exempted from gift taxes. So, sponsoring a grandchild’s college tuition or a relative’s hospital bill directly can be a smart tax move.
Gift assets like stocks or property, and you'll be taxed on its current value, not the purchase price. For example, gifting a stock originally bought for $10,000 but now worth $20,000 would see taxes on the latter value.
Lastly, when venturing into the realm of gifting, especially with sizable amounts, it's a good practice to sync with a tax professional. This ensures you're tapping into all tax benefits while mitigating liabilities. Remember, while gift taxes have numerous exclusions, understanding them and planning wisely ensures that generosity doesn’t come with an undue tax bill.