Gift Taxes: What You Need to Know
If you’re planning on giving a gift to someone, it’s important to understand the tax implications that come with it. While most gifts are not subject to taxes, there is a federal gift tax that applies in certain situations. Here’s what you need to know about gift taxes.
What Is the Federal Gift Tax?
The federal gift tax is a tax on transfers of property or money from one person to another without receiving anything in return. The current federal gift tax rate is 40%, which means that if you give someone $100,000 as a gift, you would owe $40,000 in federal gift taxes.
However, before you start panicking about how much you might owe in taxes for your next birthday present for your friend or family member, keep in mind that there are several exemptions and exclusions from the federal gift tax.
Annual Exclusion
The annual exclusion allows individuals to give up to a certain amount each year without having to pay any federal gift tax. In 2021, the annual exclusion is $15,000 per recipient. This means that if you give your sister $15,000 this year and also give your nephew $15,000 this year (or anyone else), neither of those gifts will be subject to federal gift tax because they fall under the annual exclusion limit.
Lifetime Exemption
In addition to the annual exclusion limit, there is also a lifetime exemption amount that individuals can use over their lifetimes. The lifetime exemption amount for 2021 is $11.7 million per person or $23.4 million for married couples who file joint returns.
This means that if you have already given away more than the annual exclusion limit ($15K) in any given year or intend on giving more than this amount during your lifetime then an individual can take advantage of the lifetime exemption which allows them not only avoid paying taxes but also reduces their estate tax liability.
Spousal Exclusion
If you’re married, you can also take advantage of the spousal exclusion. This allows you to give unlimited gifts to your spouse without having to pay any federal gift tax.
Educational and Medical Exclusions
Finally, there are two exclusions that apply specifically to educational and medical expenses. If you pay someone’s tuition or medical bills directly, those payments are not subject to federal gift tax and do not count towards your annual exclusion limit.
Conclusion
In summary, most gifts will not be subject to federal gift tax thanks to the annual exclusion limit and other exemptions available. However, if you plan on giving large sums of money or property as a gift, it may be worth consulting with a financial advisor or accountant beforehand to ensure that you’re taking full advantage of all the available exemptions and avoiding any unnecessary taxes.