Gift Taxes: The Not-So-Funny Side of Generosity
It’s the season of giving, and many people are feeling extra generous this year. However, before you start showering your loved ones with gifts, it’s important to understand the not-so-funny side of generosity – gift taxes.
What is a Gift Tax?
A gift tax is a federal tax on any transfer of property from one person to another without receiving fair market value in return. In simpler terms, if you give someone a gift worth more than $15,000 in a calendar year (as of 2021), then you may be subject to pay taxes on that gift.
Who Pays Gift Taxes?
As the giver of the gift, it’s your responsibility to report and pay any applicable gift taxes. However, there are some exceptions:
• Gifts under $15,000: As mentioned earlier, gifts under $15,000 per person per year (as of 2021) do not require reporting or paying any taxes.
• Spouse: You can give an unlimited amount of gifts to your spouse without being subject to gift tax.
• Educational or Medical Expenses: Payments made directly to educational or medical institutions for someone else’s tuition or medical expenses are exempt from taxation.
How Much Are Gift Taxes?
The current federal gift tax rate is 40% on gifts exceeding the annual exclusion limit ($15k as previously mentioned). For example; If you gifted your friend $20k this year then only $5k will be taxable which would put their total taxable amount at just over $2k after exemptions and deductions.
How Do You File Gift Taxes?
If you’ve given away more than the annual exclusion limit in a calendar year then you’ll need to file Form 709 (United States Gift Tax Return) with the IRS by April 15th following that calendar year. This form provides details about each recipient and how much was gifted. The good news is that generally, gift taxes are paid by the giver rather than the recipient.
Conclusion
Gift-giving can be a wonderful thing, but it’s important to understand the potential gift tax implications and plan accordingly. No one wants to receive unexpected bills from the IRS in the new year! So before you start filling up your shopping cart, consider consulting with a tax professional who can provide guidance on how to best navigate gift taxes while still being generous this holiday season.