In 2021, the gift tax limit is $15,000 per person per year. This means you can give up to $15,000 to as many people as you want without any consequences. But the term “gift tax” probably doesn’t mean what you think.
The term is misleading. It sounds like gifts above $15,000 are subject to extra taxing, but this isn’t true. If you give a gift above the tax exemption, you only need to fill out more paperwork (IRS Form 709) with the IRS. The gift tax only applies when you exceed the lifetime gift tax, which is currently $11.58 million. Only what’s given above $11.58 million over someone’s lifetime is subject to the gift tax, taxes at 18%-40%.
How is the Annual Gift Tax Calculated?
The current gift limit is $15,000 per person per year. That means if you wanted to give ten people $15,000, there would be no triggering taxable event or extra paperwork to the IRS.
In addition, this applies to individual givers. Meaning if you and your spouse both want to give a gift to the same person, you can gift a total of $30,000 without having to file a gift tax return.
You don’t need to worry about any gift limit unless you’re approaching this key figure. Christmas gifts? No problem. Birthday gifts? Give freely! As long as it is below that $15,000 mark, you’re good to go!
What is the Lifetime Gift Tax Limit?
If you’re able to can give away more than $15,000 in one year for a gift, have no fear. The IRS doesn’t tax it. You just have to fill out some paperwork to log the gift, so it gets counted toward the $11.58 million lifetime limit.
Practically, here’s how it works.
Let’s say you want to bless your grandkids while you’re still around to enjoy it. You decide to give them $115,000 each.
The first $15,000 has no extra work. You will have to log the remaining $100,000 with the government using IRS Form 709 so they can track that gift against the lifetime limit. You now can only give each grandkid $11.48 million tax-free (or $23.045 million if you’re married).
If the next year, you do the same thing again, give away $115,000 (lucky grandkids). Similarly, you would fill out IRS Form 709, and the $100,000 would go against the lifetime gift limit. You can now only give away $11.38 million to each grandkid (or $22,93 million if you’re married).
What Does the IRS Consider a Gift?
The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money) or the use of or income from property without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
If you are unsure if something qualifies as a gift, we suggest checking with a CPA.
Are Gifts Below the $15,000 Limit Tax-Deductible?
No. Any gift that you’re giving family or friends cannot be written off on your taxes. You are responsible for those taxes.
Can I Give Money Away and Avoid Paying Taxes?
Uncle Sam will always get their money. If you’re giving these gifts to family and friends, you will end up paying the regular taxes on your income, whatever that is. This is the same for any gains you had in the market to give these gifts.
In almost every case, the donor is responsible for paying the gift’s taxes, not the recipient.
What Gifts are Tax-Free and Tax-Deductible
You can write off anything you give to a registered non-profit. Contributions to non-profits are considered charitable donations, not gifts.
What Exceptions are There?
There are a few categories where you can give unlimited gifts.
- Anything to a spouse who is a U.S. citizen
- Charitable Donations
- Political Donations
- Anything you give to a dependent
- Funds paid to a school for someone else
- Funds for medical or health insurance for someone else
For schooling, the funds given can go to any part of the experience – room and board, meals, books, and tuition, but keep your receipts so you can prove that’s what they were for if you get audited.
Does Gift Tax Apply to Property?
Property such as rental units or selling a house for cheaper than it’s worth is a special category. For example, if you own a home worth $300,000 and sell it to your kids for $200,000, that difference can be seen as a gift and apply to the gift tax and lifetime limit.
Property is tricky because it requires more paperwork to prove the assessment value, fair market value, and worth. It’s more work for you, but the same rules apply.
If a property is given to you and you sell it, your tax responsibility would be the same as if you bought it. The IRS explains it this way on their Gift Tax FAQ page:
“For example, if you were given stock that the donor had purchased for $10 per share (and that was his/her basis), and you later sold it for $100 per share, you would pay income tax on a gain of $90 per share.”
When it comes to property, stocks, and bonds, it might help talk to a CPA to decide the best course of action.
What’s the difference between a Gift Tax and an Estate Tax?
When you have a large enough estate the government wants a piece of it when you die. “Large enough” just means over $11.58 million is going to one person. This is called an estate tax. At the time of your death, the estate will be taxed before being passed on to the beneficiaries. The people receiving the estate are not responsible for paying those taxes, but it can affect the size of the estate that’s passed on.
The federal estate tax works a lot like income tax. Anything over $11.58 million is taxed at different rates. The first $10,000 is taxed at 18%, the second $10,000 is taxed at 20% until the amount reaches $1 million over the $11.58 million limit. At that point, all remaining assets are taxed at 40%.
| Amount Over $11.58 Million | Taxes Owed |
|---|---|
| $0 – $10,000 | 18% |
| $10,000 – $20,000 | $1,800 + 20% of the amount over $10,000 |
| $20,000 – $40,000 | $3,800 + 22% of the amount over $20,000 |
| $40,000 – $60,000 | $8,200 + 24% of the amount over $40,000 |
| $60,000 – $80,000 | $13,000 + 26% of the amount over $60,000 |
| $80,000 – $100,00 | $18,200 + 28% of the amount over $80,000 |
| $100,000 – $150,000 | $23,800 + 30% of the amount of $100,000 |
| $150,000 – $250,000 | $38,800 + 32% of the amount over $150,000 |
| $250,000 – $500,000 | $70,800 + 34% of the amount over $250,000 |
| $500,000 – $750,000 | $155,800 + 36% of the amount over $500,000 |
| $750,000 – $1 million | $248,300 + 38% of the amount over $750,000 |
| $1 million or more | $345,800 + 40% of the amount over $1 million |
Currently, fifteen states and Washington D.C. have estate taxes. This tax amount varies by state and has different minimums – Massachusetts taxes any estate over $1 million even though the federal government does not.
Once you receive an inheritance, that is tax-free federally—the keyword being federal. However, some states do have an inheritance tax.
What’s an Inheritance Tax?
While the federal government does not currently have an inheritance tax, some states do. This means if someone passed away and left you a gift in the will, as the beneficiary, you have to pay taxes on the estate received.
Currently, Iowa, Kentucky, Nebraska, New Jersey, Pennsylvania, and Rhode Island have an inheritance tax. Maryland is the only state that has both an estate tax and inheritance tax – double taxes! The actual percentage you will pay in inheritance tax varies by the size of inheritance and state, but Nebraska is the highest-taxed at 18%.
How Do I Pay a Gift Tax?
If you have to pay a gift tax, there are two ways to do so.
- Enroll in the Electronic Federal Tax Payment System. This is a free service provided by the government. Like any payment system, you will receive confirmation, can link a bank account, and create a pin for your tax paying needs.
- Use a wire payment. This requires no enrolling, can be done in a day, but does require some paperwork. Some banks charge for wire payments, be sure to check the fees before choosing this route.
Final Take
The gift tax is something that almost no one pays, but if you give a gift over $15,000, be prepared to do a little extra paperwork.
Some are giving gifts larger than $15,000 or are approaching the lifetime gift limit of $11.58 million. In that case, you probably have an accountant and lawyer that can help you navigate the paperwork for gift tax, estate tax, and inheritance tax!
