Are you planning on giving a gift but not sure if the recipient will like it or want it? Are your gift recipients all so wealthy that they won’t want gifts?
Like any gift, tax gifts are better when they’re wrapped. But when you give your loved ones tax gifts, they’re not the only ones with a present. You get the present of saving money on taxes and contributing to the greater good with charitable giving.
With the annual tax gift exclusion, you can give more money to your friends and family and do it tax-free. While there are limits to how much you and your loved ones can get, there are also ways to reduce taxes for both you and what you’re giving.
Annual Tax Gift Exclusion: Lifting the Burden of Tax Obligations
The annual tax gift exclusion is a rule set by the IRS that states that an individual may give a certain amount to a tax-exempt organization without being subject to the gift tax. Lifting the burden of tax obligations is a concept that has been around for some time, allowing those who are expecting higher tax liabilities to use this method to lighten the burden of tax obligations.
This exclusion also makes it easier for extended family members or friends to help another individual with certain expenses that would otherwise have to come out of the pocket of the taxpayer. It is a way to help lessen or even eliminate the need for an additional source of income to avoid tax liability.
Understanding Federal Income Tax Rates
It starts with understanding the amount of money that will be subject to taxation, and with this understanding comes the need for an income tax rate. The rates are amended each year, and one must keep updated in order to ensure they are paying the right amount of taxes. This varies depending on the level of income and is typically higher for higher income levels to ensure that those in higher income brackets pay their fair share.
Deductions and credits are applied to a tax return in order to offset the total taxes owed. Familiarizing yourself with the current standings can help to better navigate the tax system and ensure taxes are paid on time. Learn more about unfiled tax returns to stay in the loop, and be sure to file your taxes.
How Younger Generations Are Impacted by the Annual Tax Gift Exclusion
For younger generations, the tax gift exclusion is important because it may reduce the amount of tax paid on gifts from immediate family members. For example, with the annual exclusion in place, a parent can give their child up to $15,000 each year without the gift being subject to the gift tax.
This can help a young person save money and plan for their financial future. This gift amount that exceeds the annual limit is lower for younger generations.
Gift Tax Considerations
Gift tax considerations for the donor are important to understand when giving substantial gifts to individuals or entities. In the United States, the federal government imposes a gift tax on certain large gifts. Here are some key considerations for donors regarding gift taxes:
Annual Exclusion
Gift tax considerations include the annual exclusion of 15,000 dollars in gifts per year for married couples filing jointly and 8,000 dollars for single filers. This annual exclusion takes away from the tax liabilities for the donor; essentially, it allows them to provide monetary gifts up to the given amount without any personal taxation.
Combined with the unified lifetime credit, donors can give a lump sum of 1 million dollars without any taxation on the gift(s). Beyond this, costs associated with the gift must still be taken into account, such as appraisal fees, legal fees, and other administrative costs, all of which can impact the actual amount of tax owed.
Lifetime Exemption
This exemption allows an individual to make tax-free gifts up to a certain amount per recipient. For the 2019 tax year, the lifetime gift tax exemption is $11.4 million per donor.
This means that a donor can give away this amount, either as a lump sum or over multiple years, without having to pay tax on the gift. It’s important to keep track of gifts and the value of those gifts that exceed the lifetime exemption, as any amount beyond the limit will need to be reported on a gift tax return.
Marital Deduction
Married individuals may make unlimited transfers between spouses without any federal tax liability, although some states may impose a gift tax. The gift must be to the spouse’s separate marital estate rather than a jointly owned asset for it to qualify for the marital deduction.
This could include cash, investments, real estate, any type of jewelry, collectibles, and other tangible or intangible property, as long as the spouse maintains a separate ownership interest in the property. Although no gift tax would be payable on these gifts, the transferor spouse should still file a gift tax return to properly document these transactions and ensure that the marital deduction is available.
Gift Splitting
Gift Splitting allows couples filing taxes jointly to split the amount of a gift between the two of them in order to minimize responsibility for gift tax. A taxpayer must decide if the gift is eligible for gift splitting and may choose to split the value or amount of the gift regardless of who actually made the gift.
Couples must file a separate gift tax return if they wish to split gifts, and each gift must be less than 14,000 dollars in order for the splitting process to be valid. In addition, splitting payments of larger sums may require consultations with an accountant or other tax professional.
Educational and Medical Exclusions
When making a gift to support education and medical expenses, the donor needs to be aware that not all gifts are considered tax-exempt. This includes tuition payments, medical expenses paid directly to the provider, and payments made to qualified educational institutions such as universities, colleges, and trade schools.
The donor must ensure that the fair payment is made for educational and medical expenses and not for other items such as room, board, or student fees. As a donor, it is also important to note that there are limitations on the amount of money that can be given as a gift tax-free.
Generation-Skipping Transfer Tax
The GSTT is a tax imposed on gifts and transfers of property that are made to persons who are two or more generations below the donor. As such, a donor must consider the potential consequences of subjecting a gift or transfer to this tax. This includes any taxes and fees associated with the transfer, as well as any legal advice they may need to get to ensure that the transfer is compliant with the relevant regulations.
They should be aware that the value of the gifted property may need to be included as part of their taxable estate, and they should also consider any additional gift taxes that may be due as a result.
State Gift Taxes
It is important to note that gifting is taxable in some states, and the donor must determine which state gift taxes, if any, will be applicable. The total value of gifts given to any one individual in a given year must not exceed annual exclusions, or else the donor may have to pay gift taxes.
This is important to consider for individuals who wish to make annual donations to any one individual or family. It is important to remember that if the total value of the gifts given to one individual exceeds the annual exclusion, a gift tax return must be filed with the donor’s state revenue agency.
Special Tax Exemption Rules for Certain Gifts
In addition to the general gift tax rules, there are certain special tax exemption rules that apply to specific types of gifts or circumstances. These exemptions can provide additional benefits for donors. Here are some examples:
Charitable Gifts
Charitable gifts may be eligible for special tax exemption rules, depending on the amount and specific type of gift. Smaller gifts of up to $250 can often be deducted without having to itemize the deductions. Gifts of more than $250 are also deductible but require additional paperwork.
Any single gift over $250 must be accompanied by a written acknowledgment from the charity. If the aggregate amount of the gift exceeds $500, the donor will need to file Form 8283 with the IRS. However, gifts of cars, boats, or planes must also be accompanied by specific information and are subject to different valuation rules.
Spousal Gifts
These rules permit an unlimited amount of one’s earnings and assets to pass free of federal gift taxes to relocating spouses without any identification of a taxable gift for the Internal Revenue Service. Any income or capital gain generated by the gift remains taxable for the recipient’s spouse. These rules also eliminate all of the complexities of filing a gift tax return.
To qualify, the funds must be transferred due to a specific qualifying event, such as a change of job, a marriage, or the sale of a jointly owned property. Ample documentation must be maintained to prove that the qualifying event took place. These documents can include marriage certificates, pay stubs, and title deeds.
Gifts to Political Organizations
Gifts to political organizations are exempt from taxes under some circumstances. Generally, gifts to political organizations that are considered public charities and have IRS-approved tax-exempt status are not subject to taxation, and donors can claim a tax deduction if they itemize their deductions. The IRS does, however, have strict rules on gifts to political organizations.
Contributions to such organizations must be intended for use in promoting the organization’s mission, rather than being given to support particular politicians, and donors must verify that the donor’s funds have not been misused. Donors must also adjust their contributions if the amount given exceeds the annual per-person contribution limit set by the Internal Revenue Code.
Generation-Skipping Transfer Tax (GSTT) Exemption
The GSTT exemption applies when a donor makes a gift to a “skip person,” such as a grandchild, great-grandchild, or other generation. When a donor makes a taxable transfer, it is generally imposed on the transfer as an additional tax. However, if the donor makes a GSTT exemption, then the GSTT is not imposed on the transfer.
This exemption can be useful to take advantage of when making gifts to others, as it can lessen the amount of tax liability for both the individual donor and the beneficiary. If an exemption is made, the donor should be aware of additional requirements, such as filing the appropriate paperwork and potentially paying a GSTT tax on any gifts that exceed the exemption amount.
Gifts for Qualified Tuition Programs (529 Plans)
529 plans provide tax incentives to those who contribute. The earnings portion of these gifts is tax-deferred, meaning that all of the growth is untaxed until the money is eventually withdrawn.
However, if the money is used for a purpose other than paying for qualifying educational expenses, the amount that was deferred will be subject to taxes as well as an additional 10% penalty. Therefore, it is important to know all special tax exemption rules for qualified tuition programs/529 plans before making any contributions.
Gifts for Qualified ABLE Accounts
This exemption applies to cash gifts as well as gifts of property. When giving a cash gift, the donor must make sure that the specific gifting restrictions under the qualified ABLE account are adhered to.
In the case of gifts of property, the donor must be sure to adhere to both the specific terms of the qualified ABLE account as well as any applicable state or federal tax regulations. Furthermore, qualifying gifts must be reported in a timely manner by the recipient, as well as documented.
Take Full Advantage Of Your Rights To Annual Tax Gift Exclusion
The annual tax gift exclusion has been made available to help you make informed decisions about your financial matters. Start preparing smarter by taking advantage of this and understanding the implications of the federal tax rates for your personal finances. Take the time to browse through the possible options available, and take the next step today.
We hope you found this information helpful. For more tips, advice, and news, make sure to check out the rest of our blog.
