Everything You Need to Know About the Gift Tax
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Now that the holidays are rapidly approaching, many of us are brainstorming what gifts to give our loved ones. Instead of doling out the typical gift cards or buying them a present they might never use, maybe you’re thinking of giving them money or property instead.
When it comes to unconventional holiday gifting like this, many of us start to wonder how our taxes might be affected. If you gift differently this year, will you be hit with a gift tax when you file your 2021 tax return?
Thankfully, many people won’t have to worry about that. For your peace of mind, we’ve compiled some information you should know about the 2021 gift tax limit so you can decide if it’s worth it to gift a certain amount to your loved ones.
What is the gift tax?
The gift tax is a federal tax you must pay if you give someone a gift above a certain amount. The gift tax applies to assets or property, such as a home. The recipient of the gift does not pay the gift tax.
The government created this tax so that people wouldn’t simply give away their money to avoid paying their income taxes. The gift tax rate fluctuates from 18 percent to 40 percent depending on the size of the gift.
For example, if you give someone a gift that’s worth between $20,000 and $40,000, the marginal gift tax rate is 22 percent, but if you give someone a gift valued between $750,000 and $1,000,000, the marginal gift tax rate shoots up to 39 percent.
Unless you’re making a donation to a qualified charity, you aren’t able to deduct gifts on your income tax return.
What exceptions are there for the gift tax?
Thankfully, there are exceptions to the gift tax. In 2021, the annual gift tax exclusion is $15,000, which means you can gift up to this amount without having to pay the gift tax or file a gift tax return. The gift tax lifetime exclusion, which we will go over in more detail later, is $11.7 million.
Additionally, along with tax-deductible charities, you can avoid the gift tax if you give:
- Gifts to your spouse
- Gifts to a political organization
- Money for medical expenses or tuition
The annual gift tax exclusion applies to each recipient, and not to everyone you decide to give money or property to. For instance, this means that you could give $15,000 to one child and $10,000 to another without having to file a gift tax return. The gift tax also applies to each person, so you and your spouse could each gift the same person $15,000, for a total of $30,000, and still be able to avoid the gift tax.
What is the gift tax lifetime exclusion?
Another good thing to be aware of is the lifetime gift tax exemption. Let’s say you exceeded the $15,000 limit in 2021. You would need to file a gift tax return, but you could still potentially exclude the remaining gift if it falls under the IRS’s lifetime exclusion, which is $11.7 million for 2021. Essentially, this means you can gift up to $11.7 million over your lifetime and not have to pay tax on it; however, you still need to file the gift tax return if your annual gift amount is greater than the $15,000 limit.
How do you file the gift tax return?
If you don’t qualify for any exceptions, then you’ll need to file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. You may find that you won’t need to pay the gift tax even if you file, because you might be under the gift tax lifetime exclusion. However, it’s still crucial that you report any gifts you give above $15,000 that don’t qualify for an exception.
With your gift tax return, you should include copies of appraisals, copies of relevant documents having to do with the transfer of the gift, and documentation of unusual items that appear on the return, such as partially gifted assets.
The bottom line
When giving gifts this holiday season, you’ll need to stay below the $15,000 gift tax limit if you don’t want to deal with filing a gift tax return next year. But keep in mind, if you’re still under the limit for the lifetime exclusion, you may not have to pay any gift tax.
Though the gift tax may not apply to you this year, it’s best to familiarize yourself with all the tax rules before deciding how to gift in 2021 and the years to come.