Gift Tax Limits

Tom Brown |
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Tax Planning
Financial Planning

Gift Tax Limits

The Internal Revenue Service, or IRS, defines a tax exemption limit for items given as gifts. If you’re planning to give a large gift to a friend, family member, coworker, or organization, it’s essential to understand how that gift will be taxed. Navigate this crucial tax question and continue to hit your financial goals with the help of Blue Water Capital Management in the Syracuse, NY, area. Keep on giving confidently and prepare your estate with peace of mind by working with our leading team of advisors.

Understanding Gift Tax

The most important thing to understand about these taxes are the gift tax limits. In 2021, the exemption limit will remain at $15,000 per recipient. You can give up to this amount, per person, without paying a tax on the gifts. Work with our team to navigate this tax’s meaning, limits, and other details to be sure you pay the proper taxes and avoid paying unnecessary taxes on your gifts.

What Is the Gift Tax?

Transferring any investment, property, or money to another individual without receiving full compensation for the transfer is considered a gift by the IRS. Whether giving a car to your child, writing a large check to a friend, or gifting your property to a loved one, these are all legally considered gifts and may require paying a tax.

The amount of tax depends on the value of the item. This tax is traditionally paid by the donor, though the recipient can handle the payment if both parties agree upon this situation. Either way, a tax form should be filled out to disclose the amount of the gift to the IRS. These gifts’ tax rates can be between 18% and 40%, depending on the situation.

What Gifts Are Not Taxed?

For many individuals, gift taxes are not a concern. This is because of two crucial gift tax laws: annual exclusions and lifetime exemptions. These both come together to create a situation where most gifts under $15,000 per year, per individual, are not taxed.

You don’t have to keep track of every $20 bill, Christmas bonus, or dinner tab you pick up for your friends and family. This tax is designed for large gifts and a large lifetime amount of giving. There are a few other gift situations that are exempt from taxes:

  • Gifts to a U.S. citizen spouse
  • Political donations
  • Gifts to a dependent
  • Charitable donations
  • Healthcare and educational costs on behalf of another person

Be sure you work with our Syracuse-based team at Blue Water Capital Management to see if the gift tax may affect your finances. Some situations, such as a spouse who is not a U.S. citizen and educational costs beyond tuition, can affect these exemptions.

Gift vs. Estate Tax

Passing on your estate before or after your death may require estate taxes to be paid. The IRS collects taxes on an estate that exceeds the exemption limit. In 2020, this limit was $11.58 million. However, this limit is considered part of your lifetime gift tax exemption. If your estate is under $11.58 million, but it and your lifetime gifts combine to exceed this limit, you may have to pay estate taxes on the estate value over this amount.

Work with our team at Blue Water Capital Management to navigate gift and estate taxes. If you’re seeking to avoid paying these taxes, and your estate and/or the gifts you’ve made over your lifetime are near this amount, you may need to consider passing on your assets in smaller amounts. For example, it’s legal to pass on your estate in $15,000 increments to multiple individuals or a single individual over multiple years. These smaller gifts are within the annual exclusion amount, so they do not require you to pay the gift tax.

Exclusions and Exemptions

Your financial strategy with your gifts and estate center on the gift tax’s exclusions and exemptions. Because tax rates can be as high as 40%, it’s important to understand how both of these features work. Learning the features of annual exclusions and lifetime exemptions allows you to donate generously and provide for your loved ones without paying high tax rates on your gifts. Avoid any fines, fees, or improperly filed tax forms by understanding how exemptions and exclusions affect your generous giving.

Annual Exclusions

The gift tax exclusion per year can change from year to year, so it’s important to work with a financial team to stay on top of the latest information. In the 2021 tax year, the limit is $15,000 per recipient, but this can change in the coming tax years.

Keeping all your gifts under this amount per individual is one way to avoid gift taxes. The gift amount is only counted as you make property or monetary gifts over $15,000 per year. As long as your gifts and the estate total less than the lifetime limit, even these larger one-time gifts won’t require any gift taxes.

Lifetime Exemptions

Another number to keep in mind is the lifetime exemption, which is set at $11.58 million in 2020. Only gift amounts over the current yearly limit are counted in this exemption. For example, a gift of $100,000 to an individual adds $85,000 to your lifetime gift amount.

Once this amount reaches the lifetime exemption, then you’ll start paying the gift tax on the excess gift amounts. For many individuals, this isn’t an issue until they consider their estate value. Planning your gifts and your estate early on prevents any issues with passing on your estate to your loved ones.

Paying Taxes on a Gift

The IRS Form 709 deals with gift taxes. Review this form yourself or work with our team at Blue Water Capital Management to fill it out correctly as part of your regular tax filing process. You must complete this form every time you give a gift over $15,000, whether you’ve reached the lifetime exemption limit or not. This allows the IRS to track your lifetime limit to mark the moment you give more than the limit.

New York currently does not have any state gift tax, but Connecticut does. Be sure to work with a financial advisor who understands your state’s laws to inform you about any state-specific gift tax requirements.

Stay on Track With Blue Water Capital Management

Gifts are just a single aspect of your finances that you need to track as you prepare for tax season. Stay on track with your financial goals with the help of Blue Water Capital Management. Whether you live in Syracuse or the surrounding area, our team can help you review gift tax limit information. Book a meeting to consider ways to plan out your gifts and prepare your estate to avoid these taxes. Enjoy peace of mind as you give generously to your loved ones and prepare for tax season.