What is the Gift Tax?
Often, when people hear about the gift tax, they assume it is simply a part of the estate tax. Unfortunately, this assumption is incorrect. Understanding the gift tax is important because it can be triggered by a simple gift. Because of the relatively low-dollar amount, it has a much higher degree of real world application than the estate tax.
The gift tax is a tax on property transfers from one person to another when nothing is given in return.The tax also applies when someone receives something for less than its actual value. A gift can be money, property, real estate, or anything that has value. Even if there is no intent on making it a gift, it can still treated as a gift if the donor receives nothing or receives less than full value in return.
Currently, individuals can make an annual gift to a person without triggering the gift tax so long as the gift is less than $14,000.00. If the gift exceeds $14,000.00, it must be reported on a gift tax return to the IRS. Also, for any portion above $14,000.00, the donor uses up part of the $5.45 million unified credit for estate and gift tax purposes.
As you may be able to see, someone can make gifts of $14,000.00 every year to one person without having to trigger or even create paperwork for the gift tax. Likewise, individuals can make multiple $14,000.00 gifts to an unlimited number of people every year. Additionally, spouses are able to use up to $28,000.00 together on one person without triggering the gift tax.
While the gift tax may not have much application to many people when it comes to the unified credit, it is important the middle class knows about it. If parents help out with their children’s first home purchase, first car, or pay off student loans they aren’t co-signers on, they may be triggering extra tax paperwork for themselves. If this paperwork is not filled out properly, they could find themselves in trouble with the IRS.
Understanding the gift tax and the annual exclusion can provide guidance to couples looking to transfer wealth to their family members. If they are aware of the annual exclusion and stay under it, they can find themselves in a position where they not only have to create additional paperwork, but also avoid using up their unified credit which may come in handy later.