If you give someone money or property during your lifetime, you may be subject to federal gift tax. The federal gift tax exists for one reason: to prevent taxpayers from avoiding the federal estate tax by giving away their money before they die. When it comes into play, the tax is owed by the gift giver and not by the recipient. You probably have never paid it and probably will never have to. In 2018 the annual gift exclusion is $15,000 per person, meaning you can give any number of people up to $15,000 each and you would not have to file a gift tax return. In addition you can give up to $11.180 million in your lifetime before you start owing the gift tax. If you are married, your spouse is entitled to a separate $11.180 million exclusion in 2018.
There is an interplay between the gift tax and estate tax. There is an $11.180 million federal estate tax exemption for 2018. In other words you can leave up to $11.180 million to your relatives and no federal tax is paid by the estate. So if you gift more than the annual exclusion of $15,000 you would start eating into your estate exclusion. And if your lifetime gifts exceed the $11.180 million exclusion you will have to pay gift tax. A gift tax return is due even if you do not actually owe any tax to track gifts up to the $11.180 million lifetime exclusion.
The following gifts are tax exempt and you don’t have to file a gift tax return:
- Gifts to IRS-approved charities
- Gifts to political parties
- Gifts to your spouse (assuming your spouse is U.S. citizen)
- Gifts covering another person’s medical expenses as long as the payments are made directly to the medical provider
- Gifts covering another person’s tuition, as long as the payment is made directly to the educational institution
When considering making gifts, keep in mind that very different rules determine the tax basis of property that someone receives by gift versus by inheritance. For example, if your child inherits your property, her or his tax basis would be the fair market value of the property on the date you die. That means all appreciation during your lifetime becomes tax-free.
However, if he or she receives the property as a gift from you, generally his or her tax basis is whatever your tax basis was. That means the recipient will likely owe tax on appreciation during your life, just as you would have if you sold the asset yourself. The rule that “steps up” basis to date of death value for inherited assets can save heirs billions of dollars every year.
There are certainly advantages and disadvantages to making gifts and careful consideration needs to be made.
This is a basic overview of the federal gift tax. For more information please contact us or refer to IRS Publication 950 and the instructions for Form 709 which can be found at www.irs.gov.