What is the gift tax? It is the question most asked in the tax seasons while you are gifting your loved ones with a financial gift. These gifts may include property valuables that exceed a certain limit of money which means now you are eligible for tax.
Having knowledge about these tax implementations will be beneficial for you and the receiver. This can help you out while gifting your relative or any other person in a long haul.
Purpose of gift tax
The gift tax is basically a tax on the material gifts. Its purpose is to prevent someone from giving away all their assets before their demise in order to steer clear of the estate taxes or if something is gifted undervalued or completely free. The tax is mostly given by the person who gives the gift.
Further explained, if someone gives you a house as a gift or less than market value then it is now subject to the gift tax as the estate is preventing something to be sold undervalued or is bought by the potential buyer. So, to have perfect knowledge about the topic read further.
Gift tax explained further
The gift tax is only eligible to the certain value which changes over the years, for example, the gift value in 2017 was $14k. While in 2018 the value rose up to $15k. This means that the parents can give up to $30k to their adult child and in order to subject free from the tax this gift has to be split into two parents.
In case, your gift values more than the certain amount (subject to tax-free) the person has to fill the IRS Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax. This form has to be completed every year to make a gift that meets the requirement.
Conditions under which you have to pay gift tax
To understand the matter clearly you need to know that you are not eligible to the gift tax until you spend beyond the lifetime gift limit (this is set by the estate). The limit was $5.49 million per person which rose up to $10 million due to the recent inflation rates in December 2017. The recent recalculated limit is $11.18 million. The gifts that fall under the yearly prohibition limits don’t mean something negative for that lifetime limit. But you still have to fulfill the 709 forms.
Illustrated by the example that if you have three children and you distribute the gift valued $18k to each one of them. You exceed the limit of $3k on every child or $9k in total. Now, this limit will be negative to the total gift lifetime limit of $11.18 million.
Things not included to gift tax limit
There are exceptions that are not negative to the lifetime gift limit. These include:
Firstly this includes the college tuition fee. If you are paying your child’s tuition fee or are willing to pay for your relatives, friends or any other personnel.
Secondly, political offerings are also exempted from these gift limits. Just make sure that it is legal in all terms and fill in the required forms to keep a record of the political donations.
More on, these include any medical bills you have paid for your relatives and the loved ones will not add negative value to your lifetime gift value.
The gift to your other half benefits you too. Any gifts given to the spouse will not be included. So, next time while gifting your partners GO EXPENSIVE!
Lastly, any charity or donations will not be included either, whether it be cash or other ways of the offering.
In the end, the advice is to consult a tax expert or any finance management firm for further information or any more complex question regarding the subject.