Few taxpayers know much about the gift tax, but it can be an important part of your charitable efforts. What is it, and what should you know to prepare for it? Here's a short gift tax guide to help you avoid paying too much.
What is the Gift Tax?
The gift tax is a tax assessed by the IRS when you give money (or assets that are worth money) to anyone. This could apply to taxpayers who gift cash, a car, a house, or an interest in their business to others. The gift tax is supposed to be paid by the giver, not the receiver. It is intended to account for untaxed income that persons receive from other persons, but it's highly misunderstood.
Generally, most taxpayers don't wind up subject to a gift tax because the tax has an exclusion amount. Each year, you can give up to $15,000 to an individual without any tax repercussions (as of 2018). And, if you choose, you can apply the gift to a lifetime limit of more than $11 million (due to the tax reform bill). Beyond that, gifts of a higher dollar value (or fair market value) may be subject to a federal gift tax of 18% or more.
What Should You Know?
The gift tax amount is the responsibility of the givers, so you should talk to your accountant before making a large monetary gift. But there are a few ways to get around this assessment. The first is to stay under the annual exclusion amount, which is per receiver per donor. This means that a couple that files taxes jointly as married can exclude $30,000 per individual recipient. This can make a lot of difference, especially if it includes multiple children, siblings, or grandchildren.
Keep in mind, though, that the gift tax applies to all gifts given to each person throughout the year. So if you give your child $15,000 in the new year but also give birthday or Christmas gifts, you may go above the exclusion. Avoid this by staying well clear of the exclusion limit or choosing to gift assets only once per year.
There are several other ways to avoid the gift tax while making large gifts. You may, for example, generally pay a person's medical or tuition bills directly to creditors without having it applied to the gift tax amount. Charitable donations are also largely excluded.
Thinking of making a large gift? Work with an experienced accounting service to determine whether you run the risk of being subject to the gift tax or not. They can help you help you find honest ways to be a generous giver without incurring unnecessary taxes for your generosity.