If you gave money or property to someone as a gift, you may owe federal gift tax. Many gifts are not subject to the tax, but there are exceptions. Here are eight tips provided by the IRS that you can use to figure out whether your gift is taxable.
1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2018 and 2019, the annual exclusion is $15,000.
2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.
3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.
4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make.
5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:
- Gifts that do not exceed the annual exclusion for the calendar year,
- Tuition or medical expenses you pay directly to a medical or educational institution for someone,
- Gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
6. For 2018 and 2019, you and your spouse can make a combined gift up to $30,000 (up to $15,000 each) to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. Keep in mind that you and your spouse can gift multiple individuals of up to $30,000 to each beneficiary in the tax year. For example, you and your wife can gift your three children up to $30,000 to each child in one year. This is a $90,000 annual gift that can be made by you and your wife that will not apply towards your lifetime exclusion limit. For 2018, the lifetime gifting exclusion is $11.2 million per taxpayer ($22.4 million for a married couple). If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
7. You must file a gift tax return on Form 709 if any of the following apply:
- You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
- You and your spouse are splitting a gift.
- You gave someone (other than your spouse) a gift of a future interest that he or she cannot possess, enjoy or receive income from until some time in the future.
- You gave your spouse an interest in property that will terminate due to a future event.
8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.
What if my wife and I gift more than $30,000 to one person in a tax year – will I be taxed on the difference?
The answer is probably no, but you would have to look at the amount of the gift. For example, if you and your wife gifted an individual $80,000 in a tax year, but your total estate is worth less than $22.4 million, you will not have to pay a gift tax on the difference of the $50,000. You will, however, file a Form 709 (per spouse). Between both Forms 709, you would report the full $80,000 gift with the first $30,000 shown as an annual exclusion with the remaining $50,000 to be applied against you and your spouse’s lifetime exclusion. Please note that you will pay tax on any gifts that exceed your lifetime exclusion. Form 709 acts as documentation of how much gifting is being applied against the lifetime exclusion, so make sure you always keep all Forms 709 filed.
If you have any questions about whether you should file a gift tax, contact your Henry+Horne tax advisor.
Danette Holguin, EA