They say it’s better to give than to receive. But when you’re the one doing the giving, there are some extra things that you’ll have to take into account besides the packaging – like the gift tax and the lifetime gift tax exemption. When giving sizable gifts, it’s important to know about the laws surrounding the gift tax so that you don’t end up with any surprising tax bills or other difficulties. The lifetime gift tax exemption looks at how your gifts accumulate over the course of your lifetime. A financial advisor can help with gift taxes and any other financial issues you may have.
What Is the Lifetime Gift Tax Exemption?
Starting in 2020, the lifetime gift tax exemption is $11.58 million. This means that you can give up to $11.58 million in gifts over the course of your lifetime without ever having to pay gift tax on it. For married couples, both spouses get the $11.58 million exemption. This means that if you are married, you and your spouse can give away a total of $23.16 million before paying the gift tax.
One important thing to remember is that even if you don’t come close to exceeding this exemption, you still may be required to file gift tax returns. Thus, it’s important to make note of the gifts you give. If you aren’t sure if you should be filing a gift tax return, you may want to check with a financial advisor, who can tell you what the requirements are in your situation.
Lifetime Gift Tax Exemption and Estate Tax
The lifetime gift tax exemption ties directly to the federal estate tax. The federal estate tax kicks in for estates that are worth more than $11.58 million, the same amount as the lifetime gift tax exemption. (The federal estate tax exemption is transferable between spouses, meaning that when the second spouse in a married couple dies, their estate can effectively have a $23.16 million exemption.)
Gifts made each year in excess of the $15,000 annual limit per recipient reduce your federal estate tax exemption when you die. For instance, let’s say you give your grandson a gift of $25,000 in one year. The first $15,000 is not taxable because of the annual exclusion. After that, though, the remaining $10,000 counts against both your lifetime gift tax exemption and your federal estate tax exemption. When you die, your federal estate tax exemption will be $11.57 million. All money in excess of that amount will be subject to estate taxes.
What Gifts Are Always Exempt?
Certain gifts are not considered taxable. These include:
- Gifts to charities approved by the IRS
- A gift to your spouse (as long as he or she is a U.S. citizen)
- A gift to cover someone’s education tuition, if paid directly to the educational institution (does not cover gifts to cover room and board, books or supplies)
- Gifts to cover someone’s medical expenses, if paid directly to the medical facility
- A gift to a political organization
Because gifts in one of these categories are always exempt from the federal gift tax, you don’t need to report them to the IRS. Additionally, gifts to qualifying charities can actually be deducted from the total amount of gifts you made.
Do States Have Gift Taxes?
Connecticut is the only state to currently levy a gift tax. It has a $3.60 million lifetime exemption as of 2019. Beginning in 2020, Connecticut’s exemption will match the federal exemption level, which is currently $11.58 million. Gifts of more than $10,000 must be filed.
While Connecticut is now the only state with a gift tax, a number of states used to have gift taxes. Minnesota passed a gift tax in 2013 but then repealed it less than a year later. Tennessee repealed its gift tax in 2012. Residents of all states, of course, still have to abide by federal gift tax laws.
Other Gift Tax Exclusions and Exemptions
In addition to the lifetime gift tax exemption, there is also an annual gift tax exclusion to keep in mind. The annual gift tax exclusion for 2021 will be $15,000 (the same as it was for 2019 and 2020). That number may rise in the future as inflation impacts the value of the U.S. dollar. The annual gift tax applies to each individual person you give a gift to. This means that you can give up to $15,000 to as many people as you want in a given calendar year without impacting your lifetime gift tax exemption.
Let’s say you’re a grandparent with a sizable amount of money in the bank. You know that your estate will be subject to the estate tax when you die, but you want to pass some of your money to your family before that happens. If you have two children and six grandchildren, you can give $15,000 to each of them every calendar year. None of that will be subject to the gift tax or count towards your lifetime gift tax exclusion.
You won’t need to include on your tax return gift amounts that do not exceed the annual gift tax exclusion set by the IRS. However, if you do exceed the annual gift tax exclusion, you’ll have to pay taxes on the gift. Rates range anywhere from 18% to 40%. The amount by which you exceeded the annual gift tax exclusion will also be deducted from your lifetime gift tax exemption and your federal estate tax exemption.
The Bottom Line
The lifetime gift tax exemption is $11.58 million. The annual gift tax exclusion is $15,000. Any gift over that amount given to a single person in one year decreases both your lifetime gift tax exemption and the federal estate tax exemption you will receive when you die. There are a number of gifts, though, that are always exempt. Even if you are nowhere near your lifetime gift tax exemption, you must still report any gift over the $15,000 annual exclusion to the IRS when you file your taxes.
- If you’re wondering whether you owe gift tax or other taxes, you might want to talk to a financial advisor. SmartAsset can help you find an advisor with our free financial advisor matching service. You answer a few questions, and we match you with up to three financial advisors in your area. We’ve fully vetted all of the advisors on our platform, and they are free of disclosures. You can then interview each advisor to see if one of them is a good fit for you.
- Before you think about the estate tax or the gift tax, you’ll probably have to think about your retirement taxes. Use SmartAsset’s retirement tax calculator to estimate how much you’ll owe based on the state in which you live.
Photo credit: ©iStock.com/Melpomenem, ©iStock.com/artisteer, ©iStock.com/ChristianChan