What is a Gift Tax and How Can You Avoid It?
Read this before making your next gift to make sure it gets to the intended target.
There may be times in your life when you want to pay your good fortune forward and give a large amount of money to a loved one. There’s a lot of concern surrounding gift taxes, but there are limits in place that allow you to give a certain amount of money without having to pay taxes.
So you can better plan your next large gift, keep reading for more insight into how gift taxes work.
What Is Gift Tax?
Gift tax refers to a federal tax you are required to pay when you give someone a large amount of money or something worth a large sum of money (think real estate). As long as the giver doesn’t receive something of similar value in return, they may be eligible to pay a gift tax.
This is because the Internal Revenue Service (IRS) has a limit regarding how much you can give before you need to file a return and pay taxes on it. Don’t worry about this limit too much, most people won’t surpass it. There is a lifetime gift tax exemption that makes it possible to give large amounts of money or assets without running into this tax.
How to Gift Tax Works
The federal gift tax is in place to prevent taxpayers from giving away income or items of value in order to avoid paying income taxes. When you make a large gift or donation, you have to complete the federal gift tax return (Form 709) and submit it with your annual tax returns by April 15 of the year after the gift was made.
How much someone will pay in taxes varies as the gift tax rate is based on the value of the gift and can range between 18% and 40%. That being said, you don’t have to pay that tax if you don’t surpass the giving limit. The tax is only triggered if a gift surpasses a certain amount. The current annual limit is $16,000 per recipient. This means you can give gifts worth $16,000 to multiple people without triggering the gift tax.
There is also a lifetime limit on how much you can give before triggering taxes (a limit that is adjusted annually to account for inflation. As of 2022, the lifetime limit is $12.06 million. This lifetime limit doesn’t overrule the annual limit. If you continuously give away $16,000 to various individuals over the years, you can eventually run into this lifetime limit even if you never surpassed the annual limit.
How to Avoid Gift Taxes
Here are a few ways you can plan your gifts to avoid paying gift taxes.
Split gifts. If you are married you can double the number of gifts you give to specific recipients. Married couples can each give $16,000 a year to the same person without triggering taxes.
Gift in trust. Typically, gift taxes don’t apply to money distributed by trusts. The Crummey trust is a popular choice for those looking to give gifts that surpass that annual limit without having to pay taxes. Contact Fortress if you want more information.
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