One of the more misunderstood concepts in the American taxation system is that of the gift tax. Most people have heard of the term “gift tax” without a clear sense of what it is, who pays it, and when. As the holiday gift giving season heats up, you might wonder if the gift tax is applicable to any holiday gifts you give or receive. If you are giving modestly priced gifts, the answer is no, but for more substantial gifts, then the answer is more of a “maybe.”
What is the Gift Tax?
In a way, the gift tax is exactly what it sounds like: a tax on gifts made from one person to another, when there is nothing given in return for the gift (in essence, the definition of a gift). The tax is generally imposed on the person making the gift, rather than the receiver.
Why have a gift tax at all, you might ask? The gift tax is connected with the estate tax, which is the tax potentially imposed on a person’s taxable estate when they die, before it is distributed to beneficiaries. The purpose of the gift tax is to prevent people from simply giving away all of their holdings to beneficiaries prior to their death as a way of avoiding the estate tax.
What Does the Gift Tax Cover?
For most Americans, the gift tax will not be something that you will have to account for on a regular basis. The gift tax only applies to gifts made over $14,000 to a specific individual within a given calendar year. Which means you can give up to $14,000 in gifts to every member of your extended family in a given year, but any amounts over that amount will be subject to the gift tax. For example, if you buy your second cousin a $25,000 car and a $1,000 bike in a given year for a total of $26,000, you will be subject to paying the gift tax on the $12,000 you went over the $14,000 exemption. Gifts to your spouse and charities are not subject to the gift tax.
That said, any amount over the $14,000 limit to a given individual in a given year can be added to your lifetime basic exclusion amount, which is currently at $5.45 million for individuals and $10.9 million for couples. The lifetime basic exclusion rule basically combines your gift tax exemptions and your estate tax exemptions and says you can give away a combined $5.45 million (or $10.9 million along with your spouse) tax-free either through lifetime gifts or distributions after your death.
Putting this all together, if you are planning on giving anyone a holiday gift worth over $14,000 this year (or any gifts, when added to other gifts you made to that person in 2016, would put you over the $14,000 threshold), then it is worth speaking with an estate planning professionals regarding the implications of the gift on your estate planning.
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The Ledbetter Law Firm, APC is dedicated to individuals and families plan for their futures through all aspects of estate planning. Contact The Ledbetter Law Firm, APC to see how you can begin creating or updating an estate plan that incorporates the needs and goals of you and your loved ones.