How taxes on gifts actually work
The right to transfer some of your assets to another person during your lifetime by making a gift of property is one way of trying to reduce your taxable estate. The gift tax is a tax that is assessed on the value of property that is gifted from one person to someone other than his or her spouse.
For tax purposes, the definition of a gift is when you give something of value to another person without expecting something in return (measured in amounts of money or money’s worth). Examples would include personal gifts such as jewelry or collectibles, stocks, real estate, use of property, or cash gifts.
The person who pays the tax, if any is due, is the one who makes the gift. For a gift to be “valid” it must meet the following criteria:
- The donor intends to make the voluntary transfer.
- He or she is competent to do so.
- The donee is able to receive the gift and must delivery.
- The donor cedes all control over the property given.
Taxes on gifts don’t come into play unless the total amount exceeds the “annual exclusion” limit. Gifts up to a certain value per donee per year are subject to an annual exclusion by the IRS. For 2018, the annual exclusion amount is $15,000. For the donor to qualify for the annual exclusion, the donee is not subject to any restrictions and may use the property immediately.
What you need to know
If you make a gift(s) of property, money, or other types of assets, you may be responsible for paying a gift tax, due to the federal government. The donor must file IRS Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return. In addition, you may need to file a gift tax return for your state.
If you have to pay any gift tax, the return and the amount owed are due on or before April 15 of the year following the one in which you made the taxable gift. The donee(s) will not have any immediate tax consequences because the gifted property will not be included in his or her taxable income.
What you don’t need to know
Giving gifts of property, personal possessions, or cash to your family and loved ones during your lifetime is a great way to provide financial assistance but is also a way to reduce estate taxes after your death.
Laws governing how to pay gift taxes, the amount of the annual exclusion, and lifetime maximum amount change frequently, so it’s important to consult with a personal financial consulting service such as GYL.
GYL provides a full range of tax services for individuals, businesses, and not-for-profits. Our goal is to develop customized solutions for tax issues by looking at both your short- and long-term financial goals. At GYL, we want to help you maximize your opportunities while minimizing your tax liabilities.