The lifetime gift tax exemption applies to all the taxable gifts an individual makes during life, and it also applies to assets left upon that individual’s death. In 2021, that lifetime exemption is $11.78 million for individuals. Here, we answer common questions about gift taxes.
What qualifies as a “gift” as far as the IRS goes?
A gift is any money or asset that you don’t expect to receive fair payment for. This could be cash, real estate, investments, interest-free loans, and tangible or intangible assets.
There are some exemptions, or things that don’t qualify as gifts for the purposes of gift taxes. These include gifts to your spouse (provided they are a U.S. citizen), gifts to a political organization, directly paid tuition or medical expenses, and gifts to certain tax-exempt organizations.
How much can I give in a calendar year?
For 2021, the annual gift tax exclusion is $15,000 per donor, per recipient. You’re allowed to give to family members, friends, or even qualified charitable organizations up to $15,000 in assets a year, without that being subject to federal gift tax. If you’re married, as a couple you can give $30,000 to each recipient — $15,000 from each of you as a donor.
If you were to give gifts in excess of the $15,000 annual exclusion, they would be subtracted from your lifetime gift and estate tax exemption.
Can you pay for college using gifts?
Yes, you can do this by making five years worth of annual gifts at once (so, $60,000) to a 529 plan for your child or grandchild. This is called bunching. This kind of gift is only allowed once, and will trigger the necessity to file a gift tax return. You’ll then spread that gift across five years of returns.
How are gifted assets taxed?
For gifts that aren’t cash, the “cost basis” is what passes to the recipient as far as taxes are concerned. This means that if you give long-held stock that has appreciated, the recipient (should they sell the stock) wouldn’t be taxed on the current selling price. Rather, the starting point for measuring taxable gain would be your original purchase price.
When do I have to file a gift tax return?
The aforementioned scenario of bunching gifts to pay for college is one scenario in which you’d be required to file a gift tax return. Likewise if you pay a big sum (in excess of the exempt amount) for a wedding, medical bills, or other big ticket expense for a child or grandchild.
Lending money interest-free to family or friends is considered a gift as far as the IRS is concerned, so this would also require a gift tax return if it exceeds the annual exclusion. Also good to know: Every taxpayer must file their own tax return.
Does a gift tax return mean paying tax?
The gift tax rate usually applies if you’ve gifted amounts above your exclusions. Even if you gift beyond the $15,000 annual exclusion, you might not pay gift tax because the overage will count against your lifetime exclusion.
If you do have to pay, the rates range from 18% to 40%, with the giver (not the recipient) being the one to pay. Also note that even if you’re not required to pay gift tax, you still must file a gift tax return using IRS Form 709 if you exceed the annual exclusion.
How does the lifetime gift tax relate to estate tax?
The estate and gift tax exemption are the same. They’re sometimes referred to as part of the unified tax credit. As the law stands right now, your estate will only be taxed if the value of your estate exceeds the exemption.
