The belief that it is better to give than it is to receive may guide you into showing generosity throughout the year. What you may not realize is that this same generosity could create an unhappy surprise when you file your taxes. If you were particularly benevolent in the past year, the Internal Revenue Service (IRS) may want to cash in via the gift tax.
What Is a Gift Tax?
The gift tax is a tax on certain money that you give to individuals. While there are many exemptions in the gift tax law to protect you, there are certainly some occasions when unexpected taxes may surprise you. According to the IRS, the giver rather than the receiver pays the tax.
What Is the Current Gift Tax Rate and Gifting Limit?
The gift tax rate is not set in stone but varies from 18 to 40 percent based on the amount you gift. The IRS regularly raises the exemption limit, making it easier for you to become more generous over the years. The individual limit for 2020 is $15,000. As long as you stay below your annual limit, you can rest easy.
When Do You Not Have to Worry About Gift Taxes?
Besides the basic annual exemption, there are several other ways that you can get around paying hefty taxes. According to The Balance, the annual exemption applies to each person. Therefore, for married couples, you and your spouse can each give a gift from a joint account, bringing your limit to $30,000. In addition, the $15,000 limit is a per-person recipient limit. Therefore, both you and your spouse could give your son and his spouse $30,000 each for a grand total of $60,000 for the year.
Besides the annual limit, you also have a lifetime exemption. As of 2020, this exclusion is $11.58 million. Keep in mind that this lifetime exemption is a unified credit that will also include the gifts you give to others from your estate upon death. The highest tax rate of 40 percent will only apply if your estate plus your additional gifts come out to more than the $11.58 million. Thankfully, very few estates are worth that much money.
There are a few other exemptions to keep in mind. Charitable gifts to qualified organizations, payments for medical care made directly to the provider or health care system, and gifts to a spouse who is a U.S. citizen do not trigger the gift tax in most cases.
When Should You Consider Unexpected Gift Taxes?
While the annual and lifetime exemptions guard you from many unexpected gift taxes, some taxes may still take you by surprise. For example, the IRS does not tax you solely on monetary gifts. Gifts could apply to property, vehicles, trips and all other types of physical gifts that you give your loved ones. Paying the way for all your family members to attend a family reunion in the Caribbean, giving someone a house for only $100,000 when the property is actually worth $200,000, or paying your grandchild’s way through college via personal gifts could all trigger the gift tax depending on how much money each item was worth. Even loaning money to someone could count if you do not charge interest and forgive the debt.
Of course, the gift tax can become very confusing quite quickly. If you are in any doubt as to what you should do, be sure to check with a qualified tax preparer or personal accountant. If you want to avoid the gift tax altogether, just be sure to keep your gifts below $15,000 per person this year.