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Everything You Need To Know About The Gift Tax

Gifts of money or property sometimes also bring stress as both the gift giver and gift recipient have to consider any tax implications. However, most of the time a gift tax isn’t something to worry about. “Gift tax”, for purposes of this article, means a federal tax on money, property, or anything of value that one individual gives to another.
Only a small percentage of people will owe gift tax.

This is because the IRS will only get involved when a gift surpasses the annual or lifetime gift tax exclusion mark. You should, however, note that for 2021, the boundary line for annual exclusion stops at $15,000. The limit for the lifetime exclusion stops at $11.7 million.

In the event that your gift exceeds the exclusion limit, the IRS will only require that you fill some paperwork. If you’re still in doubt about gift taxation and how it works, we’ll give you a deep insight into the whole process.

In this gift tax guide, we will give you a thorough walkthrough of everything that qualifies as a gift, the types of tax exclusions, and how you can avoid them.

What Qualifies as a Gift and What Doesn’t

Taxable gifts come in many forms. However, taxing the given gift borders around the fact that the giver must not receive something of equal value in return. This return is a determinant as to whether or not you owe the IRS a gift tax.

For example, giving someone some cash without expecting them to pay back is a gift. A gift is also loaning someone without asking for some interest, especially if you later forgo the debt. Another instance of a taxable gift is including a family member as a joint owner on your bank account.

What doesn’t qualify as a gift is any gift that doesn’t exceed the annual exclusion for the year. Also, paying an individual’s tuition fees or medical bills by giving the money directly to the school or hospital instead of the beneficiary doesn’t count.

For married couples who are citizens of the U.S, whatever gifts they give each other do not count as taxable. Donations to charity/nonprofit organizations also do not qualify as taxable gifts. If you also contribute to a political organization, you can do it without paying a gift tax, no matter the amount.

Annual and Lifetime Gift Tax 2021 Exemption

There are two ways to calculate how much you can give an individual. The first is the annual gift tax 2021 exclusion and here’s a look at how it works.

Annual Gift Tax 2021 Exclusion

  • How much you can give a person depends on the yearly limit set in place by the IRS. The annual gift tax limit for 2021 is $15,000, so you will only catch the IRS’s attention if you go beyond it.
  • You don’t have to pay the gift in one sum, however. If you cumulatively go beyond the limit, you’ll have to file a gift tax return. For instance, if you give $3,000 every month for the whole year, you’ll owe a gift tax balance on $21,000. This aggregate amount is the subtraction of your $36,000 gift total from the $15,000 exclusion.
  • The IRS calculates the annual exclusion per recipient, not the total addition of all your gifts. So, you can give $15,000 to several people in the same year without incurring the need to file a tax return.
  • The IRS can also calculate the annual exclusion per giver. So if you’ve tied the knot, you and your partner could give out the sum of $30,000 annually without the need to file a tax return.

Lifetime Gift Tax 2021 Exclusion

  • With the $15,000, you also receive an $11.7 million lifetime gift tax exclusion. Since the IRS calculates the exclusion per giver, a married couple can successfully exclude double the lifetime tax limit in gifts all through their lives.
  • So, when giving away more than $15,000 a year, the lifetime exclusion comes in handy because all your excesses spill over into it. For instance, if you give your friend $250,000, you’ll only need to file a gift tax return and not pay a gift tax because your lifetime tax exclusion has got you covered.
  • Every gift tax return you file keeps track of your lifetime exclusion. If you never exceed your annual exclusion at any point in your life, then you’ll have your complete lifetime exclusion tax to use for your estate after death.

Who Gets To Pay Gift Tax and How You Can Avoid It

The giver of the gift is the only one required to pay the tax if any is due. If the giver is unable to pay, the receiver isn’t in the position to handle the payment. The receiver will only pay tax if the asset or inheritance received later produces income.
Only a few people need to pay gift tax, and this is because of the lifetime exclusion coverage. One of the occurrences that can require someone to pay a gift tax is when it is in relation to an estate. This is because large estates can surpass the lifetime exemption limit.
However, if you’re a giver who might need to pay a gift tax, here are several ways to avoid it:

  • Spreading out the gifts or finding means to pay medical or educational fees directly to the institutions instead of the receiver.
  • Put into consideration how much you’ve given out or intend to give in your life. Factor these calculations into your estate plan and also include how much you plan to give through your estate. This is because the gift tax lifetime exclusion also comprises anything left behind in your estate after death.
  • If you’re married, you and your spouse can each give $15,000 annually to the same receiver. In the end, you’ll both be giving $30,000 without having to surpass the yearly exclusion.
  • Get some advice from your financial advisor or accountant on how to distribute your assets in a manner that won’t set off gift taxes. With the help of an advisor, you can boast of greater financial security.
  • A way to keep your tax deductions in line is by employing the use of the best tax filing service or software you can find. If you have little to no basic knowledge about taxing, the filing service will help you accurately file your tax returns, get your owed refund and avoid IRS tax court issues or audits.

Another trick is waiting until the end of the year before you give your gifts. In this instance, on December 31, you can give the $15,000 sum and another on January 1st. In just two days, you’ll be paying $30,000 without having to file a tax return because the gifting occurred in two different years.
Still it stands to reason that the easiest and most viable way for a giver to avoid having to file a gift tax return is making sure not to surpass the exclusion amount.
However, in the event that you do use up your annual exclusions, you cannot avoid paying the gift tax as it is a requirement. The payment rate ranges from 18% to 40%. It is important to note that there are exceptions and rules to gift tax calculation. The instructions of IRS Form 709 will give you more information.

How to Pay Gift Tax

When you want to pay your gift tax, the first step to take is to report your gift. You will do this by downloading and filling out the IRS Form 709, which is the United States Gift and Generation-Skipping Transfer Tax Return.
The form is available for free download on the IRS website. The divided sections of the document cover:

  • Personal details
  • Information about your financial gifts.
  • Information pertaining to generation-skipping transfers.

The filing process must take place on or before the tax filing deadline. Though the form is five pages long, you do not necessarily have to fill out every section. You are only required to fill out the applicable slots and add the date and signature to the bottom of the form. When complete, promptly mail the form to the IRS with your tax return.

You should note that you cannot electronically mail Form 709. The IRS accepts only paper copies, sent in envelopes that have USPS postage. Another noteworthy point is that you should file a Form 709 every time your gifts surpass the $15,000 annual limit. It doesn’t matter if it falls within the lifetime limit.

You will always need to file the form in a year you give a gift that falls within the reportable bracket.