When you are thinking about giving a sizeable gift, it is crucial to familiarize yourself with the gift tax laws that might apply to your specific case. Otherwise, you might end up with a shocking tax bill or find yourself in trouble with the IRS. They say that giving is always better than receiving. However, when you are the one who’s giving something, you should take the gift tax rules and lifetime gift tax exemption into consideration.
What is The Lifetime Gift Tax Exemption?
Beginning this 2021, $11.7 million is the lifetime gift tax exemption. This means that you could gift a maximum of $11.7 million in your lifetime and not have to pay any gift taxes. For married couples, each spouse is entitled to this tax exclusion, which means that married couples can gift up to $23.4 million before having to pay the gift tax.
You should, however, keep in mind that even you are entitled to this tax exemption, the IRS might still require you to file tax returns on your gifts. Therefore, you should always document any gifts that you give away.
Which Gifts Are Not Taxable?
The IRS considers the following gifts not taxable:
- IRS-approved charitable gifts
- Gifts to a spouse, provided that the spouse is a citizen of the United States
- Gifts for covering another individual’s school tuition, when paid to the school directly. Note that gifts for covering school supplies, books, or room and board may be taxable
- Gifts for covering another person’s medical bills, when to the medical provider or facility
- Gifts for political organizations
Also, since the gifts mentioned above will always be exempt from gift tax, you do not have to file a tax return for them. Moreover, the IRS allows you to deduct the total value of the gifts you make to specific charities.
Estate Tax and The Lifetime Gift Tax Exemption
This specific gift tax exemption is directly tied to the estate tax. The estate tax is triggered if the estate’s value exceeds the $11.7 million lifetime gift tax exclusion. It’s likewise vital to note that the estate tax exclusion can be transferred between spouses. This means that when either spouse in a subsequent marriage passes away, their estate will be entitled to a tax exclusion worth $23.4 million.
Furthermore, gifts that exceed the $15,000 yearly limit for each recipient will minimize your estate tax upon your death. For example, if you give your grandchild a $25,000 gift in one year, $15,000 of the gift won’t be taxed due to the yearly exemption. However, the remaining $10,000 will count against the estate tax and lifetime gift tax exclusions. Upon your death, your estate tax exemption would be $11.6 million, and all the money that exceeds that amount would be subject to federal estate tax.
The Annual Gift Tax Exemption
Apart from the lifetime gift tax exclusion, there’s also the annual gift tax exemption worth $15,000 this 2021. Take note, though, that this amount might increase in the future because inflation affects the U.S. dollar’s value. This yearly gift tax exclusion applies to every individual you give gifts to. With this exclusion, you can gift as much as $15,000 to multiple people throughout the year without affecting the lifetime gift tax exclusion.
For instance, let’s say that you are a grandparent with a lot of money saved up. You are well aware that your sizeable estate would be taxed when you pass away, and you would like to give some of that money to your kids and grandkids before you die. So if you have three kids and eight grandkids, you can gift each of them $15,000 every single year. None of those gifts will be taxable our count against the lifetime gift tax exclusion.
Additionally, you don’t have to include the gift amounts on your tax returns if they don’t exceed the yearly limit. On the other hand, you will be required to pay the gift tax if you exceed the yearly limit, and the rates could be between 18% and 40%. The amount you exceeded will likewise be deducted from your estate tax and lifetime gift tax exemptions.
Strategies to Minimize or Avoid the Gift Tax
Putting Gifts in a Trust
You could give gifts that exceed the $15,000 yearly exemption limit without being taxed by creating a specific type of trust for distributing and receiving the funds. In most cases, the most suitable option is a Crummey trust. Typically, the gift tax exemption does not apply to funds distributed through trusts.
However, with a Crummey trust, the beneficiary will be allowed to withdraw funds within a specific time, such as six months or 90 days. This will give the beneficiary a present interest in the Crummey trust. As per IRS rules, this type of distribution method could be considered a non-taxable gift, depending on the specific conditions of the trust. The beneficiary will only be permitted to withdraw a sum that’s the same amount as the gift placed in the trust.
Being married affords you the option of doubling gifts. Remember that the yearly exemption applies to how much money you gift to another person. This means that even if you file joint tax returns with your spouse, you and your spouse can give a $15,000 gift to the same person. This effectively increases the gift to $30,000 yearly without triggering any taxes.
Wealthy couples commonly use this strategy to provide sizeable gifts to their kids, grandkids, and others. Furthermore, this $30,000 could be on top of your grandkid’s college tuition (paid to the school directly), for example, since this tuition gift is exempt from gift tax.
Talk to an Experienced Estate Planning Lawyer in Virginia Today
If you want to learn more about the rules and strategies regarding gift tax or other estate planning, we can help. Do not hesitate to get in touch with us by contacting us online or calling 703-520-1326 to arrange an appointment with our skilled Virginia estate planning lawyer.