During this holiday season, many gifts are exchanged as people demonstrate their affection for one another. Posts of extravagant gifts, such as expensive luggage, fine jewelry and vehicles, flood social media. Gifting is a blessing. Maya Angelou once said “[w]hen we give cheerfully and accept gratefully, everyone is blessed.” Who knew that there could be tax implications for such generosity. However, there are traps for the unwary through the federal gift tax. The donor may be required to pay gift tax on an extravagant gift or file a gift tax return.
The gift tax was enacted to prevent people from giving all their property away during their lifetime to avoid the federal estate tax that applies after death. The gift tax applies to any transfer of property for less than its full value. This can include a tangible gift, such as jewelry or a car. It can also include transactions that generally occur between unmarried couples or family members, such as taking money that a person did not deposit out of a joint account or making an interest free loan. The tax rate ranges from 18% to 40% based on the taxable amount of the gift and is imposed on the donor. Many people are not aware of the gift tax as most people are not required to pay it. However, there may be an obligation to file a gift tax return even if no tax is due.
Gifts that are not subject to gift tax, include:
- Total annual gifts up to $15,000 to a person (annual exclusion amount);
- All gifts to charitable organizations;
- All gifts made to a U.S. citizen spouse;
- Total annual gifts up to $152,000 (increased to $155,000 in 2019) to a non-citizen spouse;
- Tuition payments paid directly to an education institution;
- Payments for medical expenses paid directly to the provider; and
- Gifts to political organizations for use by the organization.
A gift tax return is required if a person makes any other gift. The return is due April 15th of the year after the gift is given.
The annual exclusion amount is subject to an inflation adjustment each year. It was $14,000 from 2014 to 2017 and increased to $15,000 in 2018. Married couples can gain an additional benefit from the annual exclusion amount. A married person may give twice the annual exclusion amount if the spouse agrees to split gifts. The other spouse does not have to contribute but cannot give any other gifts to the recipient. The married person must file a gift tax return to report the agreement to split gifts, so no tax is due on the increased exempt amount.
There is also a lifetime exclusion amount that reduces the amount of a taxable gift. The lifetime exclusion amount equals the amount of the estate tax exemption which is $11,180,000 in 2018 and $11,400,000 in 2019. If a gift tax return is required for a taxable gift, part of the lifetime exclusion amount can be applied to eliminate the gift tax. The donor can choose to pay the gift tax or apply the lifetime exclusion amount to reduce a taxable gift so no tax is due. For example, if a man gives his girlfriend a diamond necklace worth $25,000 for Christmas, there is a taxable gift of $10,000. A gift tax return must be filed, but the lifetime exclusion amount can be applied to reduce the taxable gift to zero so no gift tax is due. Using the lifetime exclusion amount to offset taxable gifts reduces the amount available at death to offset total assets that may be subject to an estate tax. However, a person with total assets below the lifetime exclusion amount does not have to worry about this and should use the lifetime exclusion to offset taxable gifts.
It is a blessing to give gifts to others. If you like to give expensive gifts, make sure the gift is below the annual exclusion amount or qualifies as another exempt transfer. Otherwise, contact a professional to file a gift tax return before the IRS comes to collect the tax. You don’t need the extra stress of a tax mess!
Shawnielle Predeoux is an attorney and tax professional at Quantum Law, LLC. Shawnielle can be reached at 443-230-3328 or by email at firstname.lastname@example.org.