The Tax Cuts and Jobs Act, effective since Jan 1, 2018, effectively doubled the 2017 lifetime estate and gift tax exemption amount to $11.18 million per individual for 2018. The exemption is indexed for inflation and stands at $11.4 million for 2019.
This implies that an individual or married couple can transfer $11.4 million, or $22.8 million, respectively, to heirs without paying any federal estate or gift tax.
These high exemption amounts help wealthy Americans plan their gifts, while prompting others to have an estate plan even if they don’t have a taxable estate.
Further, for 2019, the annual gift exclusion amount stands at $15,000 per recipient. This means you can give $15,000 to multiple individuals in a year without incurring any tax liability. Any transfer made in excess of this amount will be taxed at 40% tax rate.
In this case, the donor will file Form 709 and report the excess amount as a taxable gift. If he uses a portion of his lifetime exemption, the gift might not be taxed. However, the lifetime exemption limit will be revised to a lower amount.
Nonetheless, the lifetime exemption amount can be increased using a “portability” feature in some cases. This feature allows the assets of the deceased and portion of their unused exemption to be passed on to the surviving spouse free of federal estate tax. To avoid this, the estate tax return of the deceased must be filed.
Additionally, gift splitting allows married couples to split the value of gifts given together as a couple. This doubles the annual gift exclusion limit for joint filers; married couples can exclude a split gift of up to $28,000 per beneficiary every year. Importantly, when a gift is made of community property, it is considered that each spouse is giving half the fair market value of the gift.
Basic Gift Tax Exclusions to Know
Gifts to Spouse: Any amount transferred to your spouse as a gift will not be taxed unless he or she isn’t a U.S. citizen.
Charitable Donations: The value of charitable donations made during a year may be deducted from the amount of gift taxes an individual owes.
Education and Medical Expenses: As long as tuition fees and medical bills are paid directly to the educational or medical institution, on behalf of someone else, the donor does not incur any gift tax liability on the same.
Political Contributions: These are considered gifts and not charitable contributions, and any amount given to political organizations can be excluded from gift tax calculations. A caveat to note is that the organization must utilize the funds for its own purposes and cannot be acting as an intermediary to distribute the money to a third party.
Given the above discussion, it can be concluded that you may have to file a gift tax return even if a gift is not taxable. In fact, the IRS can impose penalties for not filing gift tax returns even if no taxes are due. Further, through proper planning, tax exposure can be significantly reduced. Hence, it is advisable to consult an estate planning attorney or refer to the IRS website to learn how taxes will affect your estate.
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