Learn About Gift Taxes and What You'll Have to Pay

The gift tax doesn't cost everyone cash out of pocket

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The U.S. federal gift tax taxes individuals on cash and properties they generously give to friends and loved ones. Fortunately, there are certain exemptions that taxpayers may rely on to reduce tax liability.

The Annual Gift Tax Exclusion

The annual gift tax exclusion is the amount you may give away per person, per year, in a tax-free manner. Gifts given as either lump sum amounts, or as a series of amounts to the same person throughout the course of one calendar year, are not subject to the gift tax, if totals do not exceed $15,000. In 2018, the annual gift tax exclusion grew by $1000--up from $14,000 in 2017. 

The annual gift tax exclusion figures are applied individually, based on each gift recipient. For example, let's say that in 2018, you gave $15,000 in cash to your daughter, a $15,000 car to your son, a $15,000 diamond ring to your best friend, and $15,000 worth of stock to each of your your grandkids. In this scenario, none of these offerings would be federally taxable, since no single individual received more than the $15,000 limit.

The Lifetime Gift Tax Exemption

The lifetime gift tax exemption refers to the total amount you may give away, over the course of your entire lifetime, which is likewise exempt from federal taxation. But it is important to note that the overall gifted amount reduces the amount of exemption you have left to shield your estate from U.S. federal estate taxes, at the time of your death.

Under the provisions of the American Taxpayer Act of 2013 (ATRA), the lifetime gift tax/estate tax exemption is indexed for inflation, therefore it increases by year. Case in point: while it was $5.45 million in 2016, it modestly increased to $5.49 million in 2017.

Surprisingly, the Tax Cuts and Jobs Act (TCJA) spiked the lifetime exemption up to $11.18 million in 2018--effectively doubling the number from the year prior. But this is only a temporary measure, which will expire at the end of 2025, unless Congress acts to renew it. Until then, the provision could effect you in the following way: let's say you give away $10 million during your lifetime, then you die in 2018. In this case, your federal estate tax exemption will only be $1.18 million—the balance of the exemption left over, after all of your generous gifting.

If your estate is worth more than $1.18 million, it will owe an estate tax on its value over that amount. 

What Happens When You Make a Taxable Gift

If you gift a $120,000 to your daughter in 2018, than $105,000 of that amount is taxable. This figure is reached by subtracting the $15,000 annual exclusion, from $120,000. Consequently, that $105,000 taxable amount will reduce your 2018 lifetime exemption from $11.18 million to $11,179,895. 

Taxable gifts must be reported to the IRS on Form 709, the United States Gift (and Generation-Skipping Transfer) tax return. The return is due on the same date as your personal income tax return, which is April 15 of the year that comes after the year in which taxable gifts were made. This is how the IRS tracks the lifetime exemption you've used up. 

Special Gift Tax Rules

There are certain types of "freebie" gifts that aren't considered gifts at all. Special rules apply to gifts a U.S. citizen makes to a spouse who is not a U.S. citizen. Furthermore, the unlimited marital deduction applies to gifts made by a U.S. citizen to a spouse who is also a U.S. citizen.

Bottom Line

Generous individuals should make sure they understand how gifts they give to their friends and loved ones can effect their tax liability. Consulting an account or an estate planning attorney can help you navigate these often tricky waters.