Gift Taxes
Did you know that gifts above a certain value are taxable? You read that right.
Savvy people who intend on gifting their assets prior to their death may not realize that gifts above $15,0000 are taxed. (This figure is for 2020 and subject to change annually.)
WHAT IS A GIFT?
A gift is transferring property, money, or anything of calculable value to someone other than your spouse. Beware that if you add someone other than your spouse to a joint bank account, any money added will count as a gift.
WHAT IS THE THRESHOLD AMOUNT?
Each person may gift up to $15,000 per recipient. A married couple may collectively gift $30,000 per recipient. These are the amounts in 2020. Note that California does not have a separate gift tax and these numbers reflect the Federal IRS gift tax amounts.
HOW OFTEN MAY YOU GIFT SOMEONE THE THRESHOLD AMOUNT?
The gift tax is annual, so every year you can transfer up to that year’s threshold amount without being taxed. All gifts given to a single recipient are accumulated throughout the year, so you may give 15 gifts worth $1,000 or a single gift worth $15,000 per year.
HOW MANY ANNUAL GIFTS MAY I GIVE?
You may make gifts to as many people as you like and will only be taxed on the amount over $15,000 per person. Therefore, if you wish to gift each child $15,000 or $30,000 for a married couple, that may be done without a gift tax.
WHO PAYS THE TAX?
The person giving the gift pays the tax.
WHO DETERMINES THE VALUE OF A GIFT?
The IRS Regulations determine “Fair Market Value” as follows:
The 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. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.
WHAT DO I DO IF I GIFT OVER THE THRESHOLD AMOUNT?
Keep receipts and talk to your CPA or tax advisor. There are certain forms that need to be filled out and submitted to the IRS.
ARE THERE EXCLUSIONS?
Yes! There are four exceptions to the annual gift tax rule. You may spend as much as you wish on any of these items without a gift tax.
Tuition: Tuition paid DIRECTLY to a qualified school is outside of the annual gift tax amount. That means that tuition may not be reimbursed. This excludes room and board.
Medical Bills: Medical bills paid DIRECTLY to the PROVIDER are outside of the gift tax amount. Again, the amount may not be reimbursed to someone who already paid, and may not be paid to an insurance company.
Charity/Political Orgs: Money gifted to political organizations, the government, or qualified charities are also not counted for gift tax purposes.
Spouse: As mentioned above, you can freely transfer property or money between spouses without taxes.
HOW CAN I USE THIS INFORMATION TO MY BENEFIT?
Now that you are aware of the annual gift tax exclusion, you can strategize as to how you would like to gift property during your lifetime. In addition to gifting during your lifetime, there are other estate planning strategies that you can follow to ensure your estate avoids probate.
For questions or to create an estate plan and strategy to avoid probate, contact me.
