Are you a generous person? If you’re someone who loves the act of gift giving, you may have heard of the gift tax. The federal gift tax applies to those who have given large gifts or sums of money to friends or relatives. Here’s how to find out if you’re one of the lucky few that has to pay gift tax.
The first thing to keep in mind is that the recipients of the gifts do not owe gift tax, just the giver themselves. Once you have given away more than $5.43 million dollars in cash or other assets during your lifetime, you will owe gift tax. If you’re married, your spouse has a separate $5.43 million dollar limitation. While this may seem like an impossible or unlikely amount to ever give away, it is important to know what types of gifts do and do not apply to the gift tax. For example, here are a few gifts that are exempt from the tax:
-Gifts to IRS charities
-Gifts to your spouse
-Gifts covering another person’s medical expenses or tuition (not including room, board, books and supplies)
Also, there is a federal gift tax exclusion that permits you to give away as much as $14,000 each year to as many people as you’d like. This $14,000 does not count towards your $5.43 lifetime amount.
Additionally, due to the 2010 Tax Relief Act, you have a $5.43 million federal estate tax exemption. You can gift up to the amount to friends and/ or relatives without paying federal estate tax. Again, if you’re married, your spouse has a separate $5.43 million. While gifts made during your lifetime will reduce your taxable estate, gifts that are more than the annual exclusion ($14,000) will also reduce your estate tax exemption.
Basically, giving gifts up to $14,000 helps reduce your taxable estate.
If you are contributing to a 529 college savings plan, there is a rule that allows you to spread out a lump-sum contribution over 5 years without incurring any gift tax or reducing your $5.43 lifetime gift tax exemption or estate tax exemption. Your spouse can do the same. The only catch is that you cannot make gifts to the same person without using your exemption.
If you are making taxable gifts over the annual exclusion, you’ll have to file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. Even though may not technically owe gift tax because of the $5.43 million lifetime exemption, you still must file a return. While you can’t file a joint gift tax return with your spouse, you can split gifts to help reduce the tax.
If you’d like more information on gift tax or how to file form 709, please give Paragon Accountants a call! We’re here to make sure your generosity is properly accounted for.
