Gift taxes are federal taxes paid by someone who transfers a gift (with significant value) to someone else without receiving a comparable gift from the other person in return. Things that are commonly considered significant gifts subject to gift taxes include real estate, large sums of money, expensive vehicles, or anything else that is highly valued.
What You Should Know About Gift Taxes
If you aren’t very familiar with gift taxes and have never had to pay one before, here is a brief overview of how they work and the details associated with them.
- The gift tax is a tax levied by the federal government on any taxpayer who gifts property or money to another person.
- The gift tax ranges based on the size of the gift and can be anywhere between 18% and 40%.
- The Internal Revenue Service (IRS) sets limits on the value of gifts a person can give before being required to file a return and be taxed on the gifts.
- Certain gifts are excluded from the gift tax requirements. They include gifts given to political organizations, spouses (who are citizens of the United States), or gifts used for tuition and medical expenses.
- The federal government offers an annual and a lifetime gift tax exemption on gifts up to a certain amount.
It’s important to understand the gift tax exemption if you want to avoid paying taxes on gifts you give to children or others.
Understanding the Gift Tax Exemption
In 1997, the annual gift tax exclusion amount was $10,000. Since then, it has changed many times. The exclusion originally indexed for inflation so that it can increase year after year to keep up with inflation. In 2021, the annual gift tax exemption was $15,000. This meant that you could give someone else money or other gifts up to $15,000 in value in the year 2021 without paying taxes on those gifts. Anything over $15,000 in value would be subject to the gift tax.
How the Gift Tax Exemption Has Changed in 2022
In 2022, the gift tax exemption has once again changed. This year, you can give a gift valued up to $16,000 without paying a gift tax. This increase in the exemption is a response to the rapid inflation impacting the economy. Together, a U.S. couple can donate $32,000 to a non-spouse family member without using any of their federal gift tax and estate exemption.
Get Advice for Qualifying for Gift Tax Exemption
If you want to give a large gift to one of your children or someone else, there may be things you can do to qualify for a gift tax exemption. You may wish to split the gift between you and a spouse or another family member so you aren’t gifting the entire amount by yourself. You may also be able to assign any gifts exceeding the annual exclusion amount to your lifetime exemption (which allows you to move the gift tax over to the unified credit exemption).
If all of this confuses you, don’t worry. You can rely on AmeriEstate to help you make wise decisions regarding expensive gifts. We can also help you with your trust settlement and capital gains avoidance needs. Contact us today to learn more.