Two words that you normally wouldn’t want to put together: gift and tax. After all, a tax is the opposite of a gift, isn’t it?
However, the IRS does impose a gift tax on the transfer of money or property as a gift. In other words, if you give your friend money or transfer property to a family member without asking for anything in return, you may need to pay a tax on its value.
Luckily, the IRS also imposes a few exclusions that stops the gift tax from penalizing you for your generosity. Here’s everything you need to know about the gift tax before you get out your checkbook.
What Is the Gift Tax?
The federal gift tax applies to the transfer of money or property to an individual when payment for or the full value of said money or property is not received in return. As the person doing the giving, you are responsible for this tax.
Luckily, the gift tax is not as intrusive as it sounds. You can give gifts to the people you love without worrying about paying taxes, as long as you stay below a modest limit. If your annual gifts remain below $15,000 in value, or if they are considered exclusions, you can hand out as many gifts as you please without worrying about the IRS worming its way into your personal finances.
Gift Tax Exclusions
The government doesn’t categorize all gifts under the same umbrella. If you give any of the following gifts, a gift tax exclusion will protect you from paying those pesky taxes:
- To your spouse
- To a political organization
- That fall below the annual exclusion amount per calendar year
- To cover tuition or medical expenses
The annual exclusion amount changes with time. In 2018 and 2019, you could give somebody up to $15,000 annually without worrying about a gift tax. Keep in mind that this is exclusion is per person. You can give $14,000 in stocks to your best friend, a $10,000 vehicle to your sister, and $11,000 in property to your parents without ever paying a gift tax.
Also: a married couple can each give $15,000 to the same recipient, raising that gift to $30,000 per year.
If you are lucky enough to be in a position to give multiple gifts throughout your lifetime, you’ll eventually hit a lifetime exemption limit. This limit increases each year, and in 2019 it sits at $11.4 million.
Think of a bucket that can hold $15,000. If you give a gift that exceeds the $15,000 exclusion, the extra “spills out” of the bucket and is counted toward your total lifetime exclusion. For example, if you give your grandchild $25,000, then $15,000 counts to your annual exclusion and the other $10,000 is applied to your lifetime exclusion of $11.4 million.
If you are able to give so generously that you exceed your lifetime exclusion, your tax rate will fall between 18% and 40%.
Filing a Gift Tax Return
Once you exceed $15,000 in gifts to any one person, you must file an IRS Form 709 to let the IRS know about your generosity.
Depending on the complexity and size of your gifts, you may consider asking an attorney or accountant for help. It’s a five-page document that asks you to provide:
- Your personal information
- A computation of taxable gifts
- A reconciliation of taxable gifts
- Any gifts from prior period
- More complex items like generation-skipping transfers and deceased spousal unused exclusion (DSUE) amounts
Along with the information requested, you may also need to submit copies of relevant appraisals and copies of any transfer documents.
At the end of the day, the gift tax is as complicated as any other tax enforced by the IRS. You can read all about it through the IRS, but as long as your gifts stay below $15,000 per person per year, this tax shouldn’t have an impact on your wallet.
Read about micro-investing and how to get started with our complete guide: Micro-Investing: What It Is, Why It’s for You and How to Start.
