What Is Gift Tax and How Does It Work?
Throughout your lifetime, you may receive gifts from friends and family for birthdays, holidays, and other special occasions. Most often, these gifts aren’t of substantial value — at least, a value that the IRS would care about.
However, it’s not uncommon for families to want to help their children pay for college, weddings, or simply to give large amounts of money for big life events. When this happens, the cash gift — or any gift of great value, such as property — may be subject to the gift tax.
Almost everyone must file taxes, but not everyone is required to pay the gift tax. The person who gives the gift must pay the gift tax. It only applies to gifts of a certain value, and under specific circumstances.
Whether you’ve recently decided to give someone a significant amount of money or property of high value, this guide will help you understand how the gift tax works when it comes to gifts of the financial, residential, or property nature.
Table of Contents
What Is the Gift Tax?
When any kind of property is transferred from one person to another, the federal government imposes a gift tax, whether the property was intended as a gift or not. The gift tax is applied on most property given without expecting anything in return, but can also be applied when something is sold at less than face value or if you loan someone money with little or no interest charged.
How Much Can You Gift?
Depending on the value, certain gifts are exempt from this tax. In 2020, the annual exclusion for gifts is $15,000. This means you can gift $15,000 or less to an individual without having to file for the gift tax.
It’s important to note that both the way you award a gift and your gift-giving timeline is important to how the gift is taxed. Gifts and charitable donations are different — charitable donations can often be claimed as a deduction on your income taxes.
What Is the Annual Gift Tax Exclusions
If you give a gift valued over $15,000 in 2020, you are required to file a gift tax return. Inflation causes these exemptions to increase over time in $1,000 increments.
For example, the annual gift tax exclusion is capped at $15,000 this year, but that is per recipient. You are free to give $15,000 to your sibling and an additional $15,000 to another person, such as a friend or cousin. Similarly, if you are married and you and your spouse want to each gift $15,000 to someone — totaling $30,000 — you are able to do so.
Gift givers are tasked with filing Form 709 to disclose the gift, but if you are the recipient of the gift, you are not responsible for paying the gift tax.
What Is the Lifetime Gift Tax Exclusion?
Just as you are limited to what you can gift annually, you are limited to what you can gift in a lifetime. In 2020, the IRS increased the lifetime gift tax exclusion to $11.58 million. In other words, you are granted a total exclusion of $11.58 million in your lifetime.
This means that if you gift a family member $30,000, you’ll surpass the annual gift exclusion limit of $15,000, but any excess counts towards your lifetime gift tax exclusion — in this case, $15,000 of your total $11.58 million limit.
Gift tax returns are due annually on April 15. To file gift tax returns, complete Form 709 and submit it to the IRS.
What Qualifies As a Gift?
Gifts that have a monetary value might be subject to the gift tax; these include:
- Favors such as labor.
- Money, including cash and gift certificates.
Services, training, travel accommodations, and meals can also be considered gifts by the federal government and subject to the gift tax.
Generally, gifts over $15,000 will trigger the gift tax return. Similarly, paying for expensive things like weddings, vacations, tuition, and medical bills or lending money to friends and family can also trigger this tax.
What Is the Gift Tax Rate?
The gift tax rate ranges between 18% and 40%.
When you’re calculating the gift tax, note that gifts are transfers of money that don’t otherwise qualify for the IRS’s “political organization, educational, or medical exclusions.”
Who Pays the Gift Tax?
The gift-giver pays the gift tax. Of course, if you didn’t make any gifts during the year you are not required to submit the gift tax form. Similarly, if the gifts you made under $15,000 were “of present interests,” (property or income from property), you do not need to submit the form.
Filing a Gift Tax Return
It’s important to report gifts that go beyond the annual exclusion rate to the IRS. Failing to do so could result in a penalty or fine from the IRS. Use Form 709 to file a gift tax return by April 15. If you have questions about filing, you may contact the IRS in a variety of ways.
Other Payment Options
For some gifts in excess of the annual exclusion, there is a special rule that lets you spread the value over a span of five years. This allows you to pay the gift tax in the present tax year without affecting your lifetime exclusion rate.
For example, if you give someone $100,000, $75,000 of it is not taxable in a single year because of the exclusion. This means that overall, the taxable amount is only $25,000, which can be paid during the tax year or subtracted from your lifetime gift tax exclusion.
Use this gift tax guide when preparing to file your taxes.
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