Any asset you give to a person without getting something in return – AKA fair market value – is considered a gift to the government. So theoretically, any gift is taxable, but thankfully there are several significant exceptions. The receipt and administration of complex gifts requires attention to detail, adherence to applicable legal and tax rules, and communication with the appropriate tax and legal advisors, heirs, or charitable beneficiaries. As a fiduciary and registered investment advisor, our team at Triumph Capital Management is fully equipped to help you painlessly navigate the gifting process and shape your legacy of generosity.
Whether you have personally received a gift or you are looking to give generously in the coming weeks, months, or years, here is what you need to know about the gift tax to get started …
What is the Gift Tax?
Gifts of property or cash to a living donor are subject to the federal gift tax. The gift tax applies to the donor, not the recipient. However, other taxes, such as income tax may apply to the recipient.
You are generally not required to file a gift tax return unless the total gifts to a recipient exceed $15,000. The Tax Cuts and Jobs Act, signed into law in 2017, increased the gift tax threshold to $15,000 in 2018 and that total exclusion amount has remained the same throughout 2021. Each year, the exclusion amount is indexed to account for inflation.
Individual exclusions are applied for each gift recipient. As such, gifts from spouses are treated separately. This means that together each spouse can gift an amount up to the annual exclusion amount to the same recipient. Or spouses can opt to split gifts, so that all the gifts made by either partner in a year are treated as one-half by each spouse. Doing so allows both partners to utilize the annual gift tax exclusion.
How does it differ from the Federal Estate Tax?
On the contrary, the federal estate tax is applicable to property conveyed to others (with the exception of a spouse) after an individual’s death. The federal estate tax affects the estate of the deceased individual and may reduce the final monetary amount available to heirs.
How exactly are the gift taxes determined?
Gift taxes are decided by calculating the tax on all gifts made during the tax year that exceed the annual threshold and then adding that total to all the gift taxes above the threshold from years past. This number is then applied to an individual’s lifetime applicable exclusion amount. If the amassed sum surpasses the lifetime exclusion, you might owe gift taxes.
What are the exceptions to the gift tax?
Fortunately, not all gifts are considered taxable. Exceptions include…
- Tuition paid directly to an educational institution
- Medical expenses paid directly to a medical facility
- Gifts to a spouse who is a United States citizen
- Gifts to a qualified charitable organization
- Gifts to a political organization
You do not need to report these gifts to the IRS in order to apply them toward the gift tax. Additionally, any gifts to organizations on the IRS list of approved charities can actually be deducted from the total amount you gifted.
Why does the gift tax exist?
The gift tax was established to prevent taxpayers from giving money or property to others solely to avoid paying income taxes. The hope is that the gift tax will prevent undue difficulty for recipients and hold givers accountable to their tax liability, as the gift tax is only applied to the donor. Depending on the amount of the gift, tax rates can range from 18 to 40% on a sliding scale.
Are there strategies to avoid the gift tax?
Gift splitting and gifts in trust are two popular ways people can give generously and avoid incurring the gift tax. Gift splitting allows married couples to give substantial gifts to their children, grandchildren, or others on an annual basis. Parents and grandparents frequently opt to use gifts to form a trust fund for their children or grandchildren.
Our team of independent registered investment advisors will work with you to answer any questions you may have and will ensure that your charitable intentions are carried out. We can help you to make the most of possible tax advantages and formulate the best strategy for your individual needs.
Triumph Capital Management
1610 Wynkoop Street Suite 550
Denver, CO 80202
Advisory services offered through Triumph Capital Management, a registered investment advisor SEC#282814. Insurance Services offered through Triumph Capital, LLC #619821