ANSWERS TO 7 OF your most burning gift tax questions
Gifts are great, but gift tax? Not so much. The IRS allows us to send and receive gifts up to a certain monetary value within each calendar year. Gifts valued over that amount are subject to a Federal Gift Tax of up to 40%. Read below to learn how to minimize your tax liability.
1. What is a gift? The IRS defines a gift as "Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return."
2. When is a gift not a gift? As the definition above implies, a gift does not require a direct or indirect monetary return of any kind. Oprah once gifted each audience member a new vehicle. However, the IRS determined that this was a marketing tactic to boost brand loyalty, and as such, the vehicles were not recognized as a gift for tax purposes. Recipients were required to pay taxes on their new vehicles.
3. Who can receive a gift? Donors can gift anyone. This includes their children, their family, a friend, or a complete stranger.
4. Who pays the gift tax, the donor or the recipient? The donor typically pays the gift tax. If the donor fails to pay, then the tax burden could fall upon the recipient.
5. At what point is a gift subject to the Federal Gift Tax? As of 2019, donors can gift up to $15,000 to a recipient without incurring the 40% Federal Gift Tax. Donors can gift multiple recipients, each up to $15,000, without incurring the tax. Married donors can gift up to $30,000 to the same recipient. This $15,000 limit, or $30,000 for married couples, is known as the "exclusion limit". Note that the exclusion limit can change from year to year.
6. What about gifts to spouses? Spouses are exempt from the Federal Gift Tax. Feel free to gift your spouse as much as you want, as no exclusion limit applies.
7. What is a Lifetime Gift Tax Exemption? As mentioned in #5 above, gifts that exceed $15,000 are subject to the 40% Federal Gift Tax. The good news is that donors can elect to forgo this tax liability by deducting the taxable amount from their lifetime "basic exclusion" of $5.34 million. This is because the IRS allows each of us to give, tax-free, any gift or estate property up to $5.34 million in our lifetime without incurring any taxes.