As we continue the downhill slide toward the end of 2019 and the holiday season, one tax subject begins to raise a lot of questions for generous patrons: gifting. A gift tax is imposed on anyone who gives money or property to another individual or trust without receiving equivalent value in return. This applies but is not limited to cash gifts, investments, interest in a business, and real estate. Again, the responsibility to pay the gift tax lies with the donor, not the recipient. While many people will have to report their gift to the IRS from year to year, few of those donors will ever actually have to pay tax on those gifts thanks to two very key exclusions: the annual exclusion and the lifetime exclusion.
The annual gift exclusion, which is $15,000 for 2019, is the maximum amount any one individual can gift another individual in any given year without having to report it to the IRS. The annual exclusion is based on a per-recipient basis and is not a limit on the total sum of your entire gifts for a single year. Even if you are married, both you and your spouse may each gift up to $15,000 to any one person. If you gift more than the annual exclusion to someone, the IRS requires you to file a Form 709 to report the excess.
Whether or not you have to pay tax on the excess over the annual exclusion depends on whether or not you have exceeded the lifetime gift exclusion. The lifetime gift exclusion, which is currently $11.4 million per taxpayer, allows people to gift up to this amount tax-free over the course of their life. Every time you gift over the annual exclusion, the excess is deducted from your running lifetime exclusion. For example, assume you had never given a gift before and decide to give your nephew $315,000 to purchase a home. $300,000 of that gift is over the $15,000 per taxpayer annual exclusion and must be reported for that year. That $300,000 is then deducted from your $11.4 million lifetime exclusion, leaving $11.1 million available to gift throughout your life without the worry of paying gift tax.
While most people will never expend their lifetime gift exclusions, the matter becomes important again for estate taxes after you die, so it’s important to file correct Form 709’s throughout your lifetime. If you ever find yourself blessed enough to be paying gift taxes, the tax rates currently range from 18% to 40%. Every three to five years, the annual gift exclusion increases for inflation by $1,000. The IRS has not given any official word as to what the exclusion will be in 2020, but since the current exclusion of $15,000 has been in place since 2018, it will likely be another few years before we see another adjustment instated.
For help understanding gifting's impact on your taxes, please contact your HORNE tax advisor.