If you have heard of the gift tax, you may worry about paying taxes on any gifts that you give to family and friends. Fortunately, the maximum gift that you can give without being taxed is probably more than you think.
How Does the Gift Tax Work?
Every year, you can make taxable gifts up to $15,000 to a single person without owing any tax to the IRS. As long as no one person receives more than $15,000, you are in the clear.
Keep in mind that certain gifts are not taxable even if they exceed $15,000 in a year, such as payments of tuition, payment of someone’s medical expenses, gifts to your spouse if he or she is a United States citizen, or charitable and political gifts. But if your taxable gifts to a person do exceed $15,000, then you will need to either pay gift tax or apply your gift tax exemption amount.
Using Your Gift Tax Exemption
If you give someone more than $15,000 in a year, you can choose to apply your gift tax exemption so that you do not owe any gift taxes that year. This exemption (about $11.4 million on 2019) acts like a credit to offset gift tax owed. But your total lifetime credit amount decreases every time you apply the exemption.
For example, you could make a $65,000 gift to a relative this year. The annual $15,000 exclusion applies, so only $50,000 of the gift is taxable. You can then apply your gift tax exemption so that you owe no gift taxes this year. But now your lifetime exemption decreases to about $11,350,000. Over time, this seemingly large exemption can decrease greatly if you make a lot of larger lifetime gifts.
Once you pass away, your remaining gift tax exemption is used as an estate tax exemption instead. The larger exemption amount you have left, the fewer taxes your estate will have to pay if its value exceeds your remaining exemption. If you have $11,350,000 of exemption left upon your death but your estate is worth $12 million, your estate will owe taxes on the $650,000 that exceeds your exemption.
Rules Are Different for Non-Citizens
Non-citizens must take special care when making gifts. The gift and estate tax rules described above are not the same for people who are not citizens or not permanent residents of the U.S. In general, non-citizens receive less benefit from the gift tax exclusion and exemption rules.
What to Do When Making Large Gifts
You may want to speak to a lawyer before you make large gifts to relatives. A lawyer can advise on your potential tax liability, help you understand the non-citizen gift tax rules, and integrate your giving into your larger estate plan.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.
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