Florida does not have a gift tax. However, you may trigger a gift tax at the federal level depending on the value of the gifts you provide, but you won’t owe a gift tax until you breach your lifetime gift and estate tax exemption. The Tax Cuts and Jobs Act signed by President Trump raised that threshold. For individuals, it is $12.06 million for 2022. Regardless, you may still have to report some gifts that fall far below that value in order to avoid trouble with the IRS. A financial advisor can help you with estate planning and tax-related matters. Let’s break down how the gift tax works and what you can do to avoid triggering it.
Repeal of the Florida Gift Tax
While the federal government imposes a gift tax, some states do levy their own as well. Florida, though, repealed its own gift tax in 2004. But before you take a big breath of Florida air, let’s explore the federal gift tax.
We’ll begin by defining what exactly a gift is. The IRS basically defines a gift as any transfer of money, assets or property to someone else while not expecting to receive something of equal or greater value in return. This is based on the fair market value of that transfer. For cash gifts, it’s pretty straightforward. When you buy someone a house or vehicle, however, the value depends on a reasonable price someone would be willing to pay for it if he or she had no obligation to do so.
Federal Annual and Lifetime Gift Tax Exclusions
Luckily, everyone has an annual gift tax exclusion. This is the amount you can transfer to any individual without catching Uncle Sam’s attention. The Trump Tax Plan raised that level; for 2022 it is $16,000. This applies per person, per year. So you can give your son, daughter and nephew a gift up to the applicable annual limit every year without worrying about any gift taxes.
But even if you go over that limit for one particular person, it doesn’t mean you’d have to pay a gift tax with money out of your own pocket. However, you’d have to report the gift under IRS Form 709: the United States Gift (and Generation-Skipping Transfer) Tax Return.
The IRS requires this to keep track of how you use up your lifetime gift and estate tax exemption. The Tax Cuts and Jobs Act raised the lifetime gift and estate tax exemption to $12.06 million in 2022. But once you begin providing gifts worth more than the applicable annual limit to any individual in a year, you begin to eat away at this lifetime exemption. We’ll explain this further.
How Does the Lifetime Gift and Estate Tax Exemption Work?
Remember, the annual gift tax exclusion for 2022 stands at $16,000. So feel free to transfer gifts valued in this amount to any number of individuals, each without worrying about taxes.
But if you go above that threshold for a particular person, you begin to reduce your lifetime gift and estate tax exemption of $12.06 million (as of 2022).
Think of the “annual exclusion” and “lifetime exemption” as buckets of water. If you fill one up (annual exclusion), it runs over into the next one (lifetime exemption). Once you fill the latter, that’s when Uncle Sam steps in.
The IRS can levy a federal gift tax on what spills out of that lifetime exclusion bucket. The gift tax rate can climb to 40% depending on how much of that money exceeds your lifetime exemption.
Florida Estate Tax
As far as the IRS is concerned, you’re giving gifts if you pass away and leave behind your estate to your heirs. This is why it’s called the gift and estate tax exemption. When you begin to reduce your lifetime exemption when you’re alive by providing taxable gifts, you have less of your estate to leave behind tax-free.
Hypothetically speaking, you would have $12.06 million worth of your estate (total value of all your assets upon death) to pass on to loved ones tax-free if you never put a dent on your lifetime exemption and were to pass away in 2022.
But if you transfer an estate valued at something higher than that upon death, the federal government can tax a portion of the estate you leave behind before it’s transferred to the designated heirs. As noted above, the federal estate tax rate can climb to 40% depending on the size of your taxable estate.
Luckily, there is no Florida estate tax. In addition, the state doesn’t enforce an inheritance tax, so your heirs are generally free from being taxed on what you leave behind to them. In addition, there are several steps you can take to reduce your estate while alive in order to protect what you leave behind to loved ones from the hands of the federal government.
How to Reduce the Size of Your Estate
As you can see, the value of your estate needs to exceed a large amount when you pass away in order for Uncle Sam to take a cut. But even wealthy families have some options to protect their estates from taxes.
One way is to reduce the size of your estate while you’re alive by giving the maximum amount allowed in a year to as many people as you want without even having to report it. Plus, this annual exclusion generally rises each year to keep pace with inflation.
You can also take advantage of trust funds. There are several types out there, but we’ll explain the basics of irrevocable trusts. You set one up with the guidance of an attorney. As the creator of the trust, you can designate your beneficiaries. The assets that you transfer to the trust are no longer your property as far as the IRS is concerned. Thus, they effectively reduce your estate. When you pass away, the assets and any income they have generated get passed on to the proper heirs.
You can build a trust with virtually anything of value including these:
- Savings accounts
- Retirement plans
- Certificates of deposit (CD)
- Investment portfolios
- Funds (exchange-traded and mutual)
But in any case, certain gifts you make will never be taxed.
What Doesn’t Count Toward the Gift Tax?
When you transfer money or property to specific persons or entities, the IRS doesn’t consider the move a taxable event regardless of the amount. In other words, these moves don’t reduce your lifetime exemption. We’ll explain a few below.
- Spouse: You can give your husband or wife as much as you want and the government can’t tax it as long as your spouse is an American citizen. If your spouse is not a citizen, however, you have an annual limit before it starts to eat away at your lifetime exemption. For 2022 it’s $164,000.
- Charities: Uncle Sam loosens up the strings a bit if you’re sending gifts to help those in need. So you can donate any amount you’d like to certain registered nonprofit organizations without incurring any gift taxes. In fact, you may even receive some charity tax deductions. The definition of a nonprofit can be elusive under the eyes of the IRS, however. It’s best to seek the guidance of a tax professional or financial advisor when considering the possibility of making a large charitable gift.
- Medical Expenses: If you send money directly to a medical facility to cover someone else’s eligible medical expenses, it’s not a taxable event. Nonetheless, you should seek a tax professional for the specifics of what counts as an eligible medical expense.
- Educational Expenses: If you send money to an educational institution to cover tuition, the government won’t tax it regardless of the amount. However, you have to send it directly to the school. If you send it to the student, the IRS considers it an ordinary taxable gift depending on the amount. Still, the IRS allows an exemption when it comes to 529 college savings plans.
Gift Tax Exemption and 529 Plans
If you’re investing in a 529 plan for a beneficiary such as your son or daughter, you’re technically making gifts. However, the IRS allows you to contribute up to $80,000 without cutting into your annual exclusion as long as you agree to not make any more contributions toward a 529 plan for the same beneficiary in the next five years.
In essence, the IRS lets you use five years’ worth of annual exclusions for this beneficiary at once as long as it goes toward a 529 plan. For 2022, that’s $16,000 multiplied by 5, or $80,000. If you choose to contribute less than five years, it’s pro-rated. So if you contribute $32,000 ($16,000 x 2), you’ve used up two years of your annual exclusion. And therefore you can’t contribute toward the plan for the next two years instead of five.
The great thing is that the move would not eat into your lifetime exemption or whatever the amount is at any given time. If you simply gave the beneficiary $80,000, you would reduce your lifetime exemption because you gave an individual more than $16,000 in one year.
But what if your son or daughter is in college and you don’t have an active 529 plan in their name? You can always send money directly to the school to cover tuition. Plus, you can send up to $16,000 directly to each student to cover other educational expenses. Neither move requires you to report it to the IRS. And neither lowers your lifetime exemption.
What Else Should I Know About Gift Taxes?
The Tax Cuts and Jobs Act triggered one of the most significant overhauls of the tax code since the 1980s. The lifetime gift and estate tax exemption rose dramatically, for instance. However, the new rate and other provisions are set to expire in 2025. Unless Congress takes action to make these tax cuts permanent, the rate likely would revert back to its pre-2017 level of roughly $5.49 million.
The Bottom Line
Even though the state of Florida no longer enforces its own gift tax, you may still owe a federal gift tax. The IRS allows you to give up to $16,000 annually (for 2022) to any individual without catching the agency’s attention. If you exceed this limit, you may just have to report it under IRS Form 709. When you do that, however, you begin to eat away at your lifetime gift and estate tax exemption. You’d owe an out-of-pocket gift tax only after you exceed that threshold in gift giving. But keep in mind that this new level is temporary as of this writing. Less any Congressional action, it’s set to expire Dec. 31, 2025, and may revert back to its pre-2017 level of roughly $5.49 million.
Tips on Protecting Your Estate from Taxes
- Estate and tax planning can be complicated. That’s why a financial advisor’s guidance and insight can be so valuable. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re affluent, the federal government may take a large chunk of your estate when you pass away. And while it’s never an easy task to plan for your final days, it always helps to seek a professional to guide you through the complex process of estate planning to make sure you leave behind as much as you can for your loved ones.
- You can also check out our in-depth study on the top 10 financial advisor firms in Florida to get started.
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