If you intend to transfer your assets, which include money or property, to someone who is not your spouse or dependent as a gift, know that you will be required to pay a gift tax. Let’s dive into the fundamentals of gift taxation to help you understand how to navigate the laws surrounding it.
What Is Gift Tax?
A gift tax is a federal charge that is imposed by the Internal Revenue Service (IRS) on property that’s transferred from one person to another person who pays nothing or only a portion of the actual worth in return. Additionally, if a person sells a product at less than its value or offers an interest-free or low-interest loan, it may be considered a gift.
The gift tax is levied on the donor and falls between 18%–40% of the asset’s original worth. Though this may sound cumbersome if you’re considering gifting away assets such as money, real estate, vehicles, art or securities such as stocks and bonds, with the right tax attorney to guide you through the IRS provisions, you may not pay a dime in gift tax.
Gift Tax Exemptions
While gift taxation typically applies to sizable gifts, certain exemptions exist to reduce the tax burden on Americans. These exclusions represent the number of gifts you can make yearly and over your lifetime without incurring taxation. These include:
Annual Exemption
The annual exemption is a provision by the IRS that allows you to make gifts up to a certain amount each year without incurring tax. As of 2023, the annual exemption allows you to make gifts of up to $17,000 yearly to any number of recipients. For example, if you have two children, you can transfer as much as $17,000 per child for a total of $34,000, entirely tax-free.
Lifetime Exemption
The lifetime exemption is another provision by the IRS that allows you to make gifts up to a certain amount over your lifetime. It represents the total amount you can give away throughout your life without incurring gift tax. As of 2023, the IRS set the gift tax lifetime exemption at $12.92 million per individual. This means that, even if you exceed the annual exclusion amount, the excess is simply deducted from your lifetime exemption when you fill out the IRS Form 709. For example, if a father chooses to give a $20,000 car to his grandson on his college graduation, the excess of $3,000 above the annual limit of $17,000 will be subtracted from the lifetime exemption.
Not Every Gift Is Taxed
For certain gifts, you don’t need to pay tax, and you don’t need to apply for exemptions, either. These gifts are entirely tax-free. They include:
- Gifts given to a spouse or dependent (who are U.S. citizens)
- Gift payments for school tuition (made directly to the school account)
- Gift payment for medical care (made directly to the hospital’s account)
- Charitable donations
- Political contributions
Helpful Tips for Gift Tax Planning
Do you want to reduce your estate tax? Gifting your property helps to avoid these unnecessary expenses. Some other tips to help you with gift tax planning include:
- Being married doubles your gift tax exemption amounts, meaning you and your spouse can give $17,000 each for annual exclusion and $12.92 million each for lifetime exemption ($34,000 and $25.84 million, respectively).
- The IRS raised the exclusion amounts from $16,000 and $11.7 million in 2022 to $17,000 and $12.92 in 2023 — the highest ever.
- Consider trusts to maximize exemption.
- Hiring an experienced tax attorney for expert advice and guidance will help to enjoy the full benefits of gift taxation exemptions.
The Experienced Estate Planning Attorneys at France Law Can Help You Navigate Gift Tax Laws
Are you looking to create a will, manage your estate or plan your federal income tax or gift tax? The business law attorneys at the Florida-based France Law know the best strategies to help you have a stress-free journey, accomplishing your objectives with no necessary taxations or complications. Contact us today to book a consultation.
