As the holiday season approaches, gift-giving is in full swing. It’s natural to feel extra-generous this time of year, maybe so generous as to give a substantial amount to a family member in need. Whether it’s to your son saving for a new car, or granddaughter who wants to go to medical school, know that your taxes will be affected by the contributions you make.
What is the gift tax?
According to Investopedia, a gift tax is a federal tax that may be imposed upon any individual who wishes to gift something of monetary value to another individual without any payment in return.
This item being given to another person can count as a “gift” in the eyes of the IRS. The rule applies even if the receiver of the gift is paying for a certain percentage of it. For example, if you give some money to your child to pay for their vacation, that money may be subject to a gift tax. This is true even if your generous donation to them didn’t cover the entirety of their vacation expenses.
It’s important to note that some philanthropic donations and gifts to certain people are exempt from the gift tax, such as gifts to a spouse, gifts to a political candidate or organization, gifts for medical or educational expenses, and gifts that are less than the pre-set monetary threshold for what defines a gift. If this gift is not a monetary gift (i. e. you are gifting someone an object rather than cash), the object’s financial value on tax forms is its fair market value. According to the IRS, fair market value is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. ”
Keep in mind that this definition of a gift tax is generally accepted at the federal level, but that specific areas or specific transactions may have various other conditions apply to them. If you have any specific questions about your personal gifts to friends and family, what may or may not be subjected to a gift tax, or how much you owe in gift taxes, it’s always a good idea to consult a financial professional.
When does the gift tax affect me?
Gift taxes can begin to affect you when you cross a certain threshold for giving significant amounts of money to someone during the course of a year.
According to the IRS, this federal monetary threshold is an annual $15,000 for 2019. If someone gifts over that amount to the same individual, they must fill out a gift tax return form. This gift exclusion applies to each person whom you provide a gift. For example, you could give $15,000 to your daughter, $15,000 to your son, and $15,000 to a friend without having to pay a gift tax.
On top of the $15,000 annual gift exclusion, there’s also a lifetime gift exclusion. According to Nerd Wallet, that amount in 2019 is $11. 4 million. This means that whenever you give a gift to friends or family that is valued over $15,000, you’re chipping away at your $11. 4 million lifetime gift exclusion with whatever amount exceeds the $15,000. This means that you may not need to pay a gift tax right away, but you’ll still need to fill out a gift tax return form, which may require the help of a professional.
As the holiday season approaches, you may be in a generous mood and wish to gift a significant amount of the wealth you’ve amassed to your loved ones. Whether you’ll be giving money to your children to spend on a well-deserved vacation, to your grandchildren to help them buy that new iPhone they’ve been asking about, or to your extended family to help them afford some luxurious presents that may have been out of their price range, it’s important to be aware of gift taxes.
Once you cross that threshold, you may owe a small percentage of that gift money to Uncle Sam instead of your family. For this reason, it’s wise to consult both a tax professional and your local gift taxing laws when determining how much you may owe in gift taxes.
What can I do to manage it?
The easiest step that you can take towards managing your own gift taxes is to fully understand how the gift tax system works.
It’s important to know that gift taxes can apply to any transaction between two parties, whether directly or indirectly, where one party is given something of financial value and the giver does not get fully reimbursed for it. It’s also important to know that any gifts you may give to your loved ones over $15,000 may be subject to a gift tax.
Another way to easily manage your gift tax audits is to consult a professional. This is particularly important if the gift that you’re planning to give is particularly large or complicated. The professional can help you pre-plan your annual gift giving, keep any gift taxes that you may have to pay in alignment with your broader financial goals, and assist you with the process of filing a gift tax return. If you’re looking for advice or more information regarding gift tax planning, contact an M3 Wealth Advisors professional today.
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