What You Should Know About the Gift Tax
Typically, the gift tax rate is much higher than the income tax rate. Furthermore, the IRS broadly defines “gifts” to include any transfer of property or assets from one person to another without receiving full value in return. It applies to cash, real estate, investments, or any other valuable item given as a gift. As far as the IRS is concerned, any discounted transfer is usually a gift.
Fortunately, only a minute percentage of donors pay the gift tax, partly because of the generous exemptions and exclusions, and partially due to the efforts of a St. Petersburg estate planning lawyer. An attorney often finds obscure exceptions and loopholes that expand gift tax exemptions. As a result, more money goes to your heirs, and less money goes to the government.
Annual Gift Tax Exclusion
As of January 1, 2025, the annual gift tax exclusion is $19,000 per donor. Married couples can combine their exclusions to jointly give $38,000 per recipient per year without tax implications. The 19k (or 38k) may be directed to one lucky recipient (donee) or spread out among several donees.
The marriage expansion effectively quadruples the annual gift tax exclusion. For example, if Laura and her spouse give $38,000 to each of their two biological or legally adopted children in a year, a total of $76,000 can be given tax-free and without filing a gift tax return.
The exclusion also applies to the reporting requirement. So, there’s no way a donor who stays inside the lines appears on the IRS’ radar.
Lifetime Gift and Estate Tax Exemption
In addition to the annual exclusion, a lifetime exemption covers gifts that exceed the annual limits. As of January 1, 2025, this exemption is $13.61 million per person (indexed for inflation and subject to change by Congress). Any gifts above the annual exclusion count against this lifetime exemption.
For instance, if Alex gives $119,000 to one person in a single year, the annual exclusion covers the first $19,000, and the remaining $100,000 reduces his lifetime exemption. Because Alex tapped into the lifetime exemption, he must file IRS Form 709 (United States Gift and Generation-Skipping Transfer Tax Return). But he owes no taxes unless and until his cumulative gifts exceed the lifetime exemption.
Who Pays the Gift Tax?
In most cases, the donor is responsible for paying the gift tax, not the recipient. If the donor doesn’t pay the tax, the IRS technically has the right to go after the recipient, but these proceedings are quite uncommon, except in large, Guggenheim fortune type-cases.
We should also note that, regardless of the amount and liability issues, the donee never pays income taxes on a gift. A gift is not income under the Tax Code.
Gifts Not Subject to Gift Tax
Several types of gifts are not subject to the gift tax and therefore never count toward annual or lifetime limits:
- Interspousal gifts to a U.S. citizen spouse,
- Direct tuition payments to educational institutions (room, board, and other expenses don’t count),
- Direct payments to medical providers for a third party’s medical expenses (payments to bill collectors and other non-providers don’t count), and
- Gifts to certain qualifying charitable organizations.
For a St. Petersburg estate planning lawyer, these exceptions are important tools in tax and estate planning strategies.
Reach Out to a Detail-Oriented Pinellas County Lawyer
The essential estate planning process isn’t as complicated as many people believe it is. For a confidential consultation with an experienced estate planning lawyer in St. Petersburg, contact Drude Tomori Law. We routinely handle matters throughout the Sunshine State.
Source:
irs.gov/pub/irs-pdf/p5368.pdf
