Federal Gift Tax
What is the gift tax? It is a federal tax on assets given away during the lifetime of a donor. The estate tax is a tax on assets transferred to heirs after the passing away of the owners. The annual gift tax exclusion enables gifting any number of people up to $15,000 each every year without the gift being taxable. In the case of married couples, the exclusions can be combined, and any number of people can be gifted $30,000 each per year. In case the spouse is a US citizen, the amount that can be gifted is unlimited. In case the spouse is a non-US citizen, gifts of up to $159,000. There is also a lifetime exclusion for federal estate & gift taxes in addition to the annual exclusion for gift tax. This is set at $11.7 million for the year 2021. This essentially implies that one can gift up to $11.7 million during or after his / her life without having to pay any federal gift tax or estate tax on the same. For married couples, this amount goes up to $23.4 million.
There is a chance that post-2025, the lifetime exclusion amount may be decreased to $5 million, adjusted for inflation. This could be a good opportunity for individuals to make the tax-free gifts to their heirs utilizing the exclusion, before any reduction in the amount in the future.
As an example, let us assume that Peter gave away assets worth $10 million to a trust for his heirs in 2019. This transfer was excluded from gift tax because the exemption was $11.58 million for 2020.
If Congress, in 2022, lowers the exemption to $5 million per person as expected, and Peter passes away in 2023 when that lower exemption is in effect, Peter’s estate would not owe any tax on his 2019 gift of $10 million, even if $5 million of it is above the $5 million lifetime limit in effect at the time of his death.
If someone other than the spouse is gifted any amount of more than $15,000 in 2021, a gift tax return will have to be filed. There are some gifts, however, that need not be reported on a gift tax return. Here is a list:
- Gifts are given to charities
- Gifts are given to a political party/organization for its use
- Tuition payments are made directly to a qualifying educational institution. This is applicable only to tuition and does not include boarding, books, supplies, or other educational expenses. The $15,000 annual exclusion can however be applied to the specific expenses.
- Medical expenses are paid directly to a care provider for the medical care of an individual. This exclusion also applies to any medical insurance paid for other individuals also, provided the payment is made directly to the insurance provider.
The federal gift tax return, Form 709 needs to be filed under certain conditions by the donor of a gift. Gift recipients are not usually required to report gifts.
Donors giving away gifts that exceed the annual or lifetime exempt gift limit established by the IRS must fill out the form and include it when filing their annual income tax returns.