Gift tax is a federal tax that applies to an individual giving anything of value to another person. In the United States, for someone to be liable for the tax, the gift must be made gratuitously, meaning without expectation of receiving something of equal value in return.
Under U.S. law, as of my knowledge cutoff in September 2021, each individual has an annual gift tax exclusion amount ($15,000 per recipient in 2021), and a person can give up to this amount to any number of individuals each year without incurring a gift tax. Gifts that exceed this annual exclusion may still be tax-free up to the lifetime estate basic exclusion amount ($11.7 million in 2021), but these amounts reduce the tax-free limit of your estate when you pass away.
For example, if you give your child $20,000 in 2021, you would be over the annual exclusion limit by $5,000. This $5,000 would be subtracted from your lifetime exclusion amount.
Remember, the laws surrounding gift tax are complex and can change over time. Also, there are certain types of gifts, like tuition or medical expenses you pay directly to a medical or educational institution, that are not subject to the gift tax. Additionally, gifts to a spouse who is a U.S. citizen are not subject to the gift tax.
Please consult with a tax professional or lawyer to understand the most up-to-date laws and their implications based on your specific situation.
Example of Gift Tax
Suppose it’s the year 2023, and the annual gift tax exclusion amount is still $15,000, which means you can give up to this amount to any number of individuals without incurring a gift tax.
Now, let’s say you decide to give your daughter a gift of $25,000. The first $15,000 of that gift would be covered by the annual exclusion, leaving $10,000 of the gift that’s potentially subject to the gift tax.
However, as I mentioned before, there’s also a lifetime gift tax exclusion. As of 2021, this was $11.7 million, although it may have increased by 2023. This exclusion means that, over the course of your lifetime, you can give away up to this amount without paying a gift tax.
So, even though your $25,000 gift to your daughter exceeds the annual exclusion amount by $10,000, you wouldn’t owe any gift tax unless you had already given away gifts exceeding your lifetime exclusion.
However, it’s important to note that this excess $10,000 would be deducted from your lifetime exclusion amount, and you would be required to report this gift to the IRS by filing a gift tax return (Form 709).
These are broad strokes and the real-life application could be more complex. Tax laws can be intricate and subject to change, so it’s always a good idea to consult with a tax professional to ensure you understand the latest regulations and how they apply to your situation.