What is the Gift Tax?
Definition: The gift tax is the tax applied to any valuable gift either money or property that an individual can give another person. Technically a gift tax will apply to almost every gift that you may give someone provided they do not pay you back in full. Therefore if you give someone a gift you are supposed to pay the gift tax although under certain instances the receiver can pay the tax.
Usually, most people will not get hit with the tax since the requirement is that the gift tax is payable if the amount of gift exceeds some set limit. Equally, if it does exceed the limit you might have to fill just some paperwork. There is a set limit of the amount of gift that you are supposed to give in your entire life and if that exceeds then you most likely will pay some gift tax.
Understanding How Gift Tax Works
The gift tax is meant to prevent individuals from giving out their property and money to others so that they cannot pay taxes. As a result, it was created to prevent unnecessary burden to the receiver and thus oblige donors to pay their taxes. One has to gift significant amounts for them to owe gift tax because there is annual exclusion and also lifetime exemption. You will only pay this tax if your gifts exceed your lifetime exemption which according to IRS was $11.4 million last year. In 2020 the lifetime exemption limit will increase to $11.58 million and therefore anything below this limit means you don’t have to file for gift tax.
However, the tax applies where a gift is something of value you give someone and don’t expect something of equal value back. There are nevertheless exceptions where git tax does not apply. For instance, if one gives a gift to a spouse and the spouse is a US citizen they are unlikely to pay gift tax. Noncitizen spouses can receive up to $157,000 without having to pay gift tax.
Equally, gifts whose value is below the annual gift tax exclusion per year and political gifts for use by political entities are exempt. Also, the gift tax is not payable on educational and medical expenses from a donor.
It is important to be keen on gift tax because it can be in places one least expects. For instance, if you loan a friend some cash without interest this might be taken as a gift according to the IRS if you chose to later forgive the debt.
Annual Gift Tax Exclusion
Annual gift tax exclusion applies to each receiver of a gift and it lets one give gifts of around $15,000 per person without paying tax. This, however, does not include the $11.4 million lifetime exemption. Therefore if you gift someone an item whose value is above $15,000, you will need to file a gift tax return by filing IRS Form 709 to declare the gift just like Mr. Beast does on his tax returns.
The per-recipient annual exclusion does not mean that you have a total limit of $15,000 because you can gift several people provided each doesn’t exceed $15,000 you don’t have to file a gift tax return. Equally, you and your spouse can gift the same person $15,000 each in a year without a gift tax.
Lifetime Gift Tax Exemption
Besides the $15,000 annual exclusion, you also get an $11.58 million lifetime gift tax exemption from 2020. And since this exemption is per person the good news is that for married individuals they are exempt double the amount in lifetime gifts. This is beneficial especially for philanthropic individuals who like gifting people.
When you reach your annual exclusion limit the excess plays into your lifetime gift tax exemption. Since there is no certainty about lifetime exemption when you will die the IRS constantly runs the total of the taxable gifts you give each year.