Gift Taxes For Estates And Trusts: Explained

Gift tax is a complex topic that can be confusing for many people. This blog post will explain everything you need to know about gift tax in simple terms.  …

Tax

September 4, 2022

Written by John Wonneberger

Gift tax is a complex topic that can be confusing for many people. This blog post will explain everything you need to know about gift tax in simple terms.

 

We will cover what gift tax is, how it works, what it covers, the different types, gift tax returns, and why it’s important. We hope this information provides you with a better understanding of gift tax and helps you make informed decisions about your finances.

 

What Are Gift Taxes?  

Gift taxes are federal taxes that are imposed when a person transfers valuable assets to another person, even if it’s not intended to be a gift. These assets can be estates or large quantities of money. The tax is imposed on the donor, and it is the responsibility of the recipient to pay the tax.

 

Types Of Gift Taxes

There are two types of gift taxes: federal gift tax and state gift tax.

 

Federal Gift Tax:  

The federal government imposes a gift tax on property transfers from one person to another. 

The tax is imposed on the donor, and it is the responsibility of the recipient to pay the tax. The federal gift tax is voluntary, and taxpayers don’t need to pay it. 

 

State Gift Tax:  

Some states also impose a gift tax on property transfers from one person to another. The tax is imposed on the donor, and it is the responsibility of the recipient to pay the tax. Unlike the federal gift tax, state gift taxes are not voluntary, and taxpayers must pay them. 

 

How Does the Gift Tax Work?  

The gift tax is imposed on the donor, and it is the responsibility of the recipient to pay the tax. The donor must file a gift tax return with the IRS, and the recipient must pay the tax. The amount of tax due depends on the value of the transferred property. 

 

What Property is Subject to Gift Tax?  

Gift taxes apply to all transfers of property from one person to another. This includes money, stocks, bonds, real estate, and personal property. 

 

Who Pays Gift Taxes?  

The donor is the person who pays gift taxes, not the recipient. The donor is responsible for filing a gift tax return and paying any taxes. 

 

Gift Tax Rate  

As of 2022, the tax rate varies from 18% to 40%. The amount of the tax imposed also depends on the relationship between the donor and recipient. 

 

Spouses who are U.S. citizens can transfer an unlimited amount of property to each other without paying a gift tax. The same goes for gifts to a political organization or charity. 

 

What’s A Gift? 

The IRS defines a gift as “a transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” In other words, if you give someone cash or property and don’t receive anything of equal value in return, it’s considered a gift.

 

Types of Gifts  

There are five types of gifts: taxable gifts and nontaxable gifts. 

 

Taxable Gifts: Taxable gifts are gifts subject to the gift tax. The donor must file a gift tax return with the IRS, and the recipient must pay the tax. 

 

Nontaxable Gifts: Nontaxable gifts are gifts that are not subject to the gift tax. The donor does not have to file a gift tax return, and the recipient does not have to pay the tax. 

 

Complete Gifts:  A complete gift is a gift of property that is transferred to the recipient with no conditions attached. For example, if you give your son a car, it is a complete gift. He can do whatever he wants with it – sell it, trade it in, or keep it. 

 

Incomplete Gifts: An incomplete gift is a gift of property that is transferred to the recipient with conditions attached. For example, if you give your daughter a car, but she has to use it for college only, it is an incomplete gift. 

 

Reversionary Interest:  A reversionary interest in the property will revert to the donor if certain conditions are not met. For example, if you give your son a car, but he has to use it for college only, the car will revert to you if he doesn’t go to college. 

 

Gift Tax Return 

A gift tax return is a tax return that the donor of a taxable gift must file. The return reports the IRS’s gift and calculates the gift tax. 

 

The due date for filing a gift tax return is April 15 of the year following the year in which the gift was made. For example, if you made a taxable gift on December 31, 2021, you must have filed a gift tax return by April 15, 2022. 

 

You may be subject to penalties and interest if you fail to file a gift tax return. Make sure to speak to professional tax services to avoid any penalties. 

 

Why is Gift Tax Important?  

Gift tax is important because it helps ensure that taxpayers do not avoid paying taxes on transferring property from one person to another. Gift tax is also important because it helps to ensure that taxpayers do not unfairly benefit from the transfer of property. 

 

What’s Gift Valuation?

Gift valuation is determining the value of a gift for tax purposes. The IRS uses three methods to value gifts: 

 

The Fair Market Value Method is the most common method, which values a gift at its fair market value on its given date. 

 

The Cost Basis Method: values a gift at its cost basis on the date it was given. 

 

The Appraised Value Method: values a gift at its appraised value on the date it was given. 

 

How the Gift Tax Return Works

The gift tax return is used to report the value of the taxable gift to the IRS. The donor must calculate the value of the gift and determine whether any gift tax is owed. 

 

If the value of the taxable gifts is less than the annual exclusion, no gift tax is owed. The annual exclusion for 2022 is $16,000 per person (15,000 for gifts given in 2021.) This means that you can give up to $16,000 to each person in a calendar year without owing any gift tax. 

 

Types Of Exemptive Relief From Gift Tax 

There are three types of exemptive relief from gift tax: the annual exclusion, the lifetime exemption, and the charitable deduction. 

 

The Annual Exclusion: is a dollar amount that you can give to each person without owing any gift tax. For 2022, the annual exclusion is $16,000 per person. 

 

The Lifetime Exemption: is a dollar amount you can give over your lifetime without owing any gift tax. For 2022, the lifetime exemption is $12.06 million per person. 

 

The Charitable Deduction: is an unlimited deduction for gifts made to qualified charities. 

 

Transfers Not Subject to Gift Tax

Certain types of gifts are not subject to the gift tax. The following gifts are not included in your taxable gifts:

 

  • Gifts that do not exceed the annual exclusion for the calendar year

 

  • You pay tuition or medical expenses on behalf of another person, as long as you pay these expenses directly to the educational institution or health care provider.

 

  • Gifts to your spouse

 

  • Gifts to a political organization for its use

 

If you make a gift that falls into one of these categories, you do not have to file a gift tax return. However, you must keep records of the gifted property, such as receipts, canceled checks, or bank statements. These records will come in handy if the IRS ever questions your gift.

 

Filing Your Gift Tax 

If you’re required to file a gift tax return, you can do so using IRS Form 709. 

 

You’ll need to report the value of any gifts made during the year and the name and address of each recipient. You’ll also need to provide your contact information, Social Security number, and signature.

 

Once you’ve completed and filed your return, the IRS will process it and notify you if any taxes are owed. If you have questions about your gift tax liability or how to file your return, you can contact the IRS directly for assistance.

 

Minimizing Gift Taxes

There are a few ways to minimize or avoid paying gift taxes:

 

Gift splitting: You can double the annual exclusion amount by splitting the gift between you and your spouse if you’re married and filing jointly. 

 

Use your lifetime exclusion: Every person has a lifetime exclusion, which is the total value of gifts that can be given throughout your life without triggering a tax. For 2022, the lifetime exclusion is $12.06 million. 

 

Give to charity: As mentioned earlier, gifts to qualified charities are exempt from gift taxes. 

 

Take advantage of annual exclusions: In addition to the general annual exclusion, there are also exclusions for tuition and medical expenses (paid directly to the educational institution or healthcare provider) and gifts made for someone’s principal residence. 

 

As with any tax-related matter, it’s always best to consult with professional tax services to ensure you take advantage of all the available exclusions and deductions.

 

Common Misconceptions About Gift Taxes

One common misconception is that gifts are only subject to tax if given in cash. Gifts of property (including stocks, real estate, and vehicles) may also be subject to the gift tax. 

 

Finally, some people believe that they can avoid paying gift taxes by simply not reporting the gifted amount on their return. However, failing to report a taxable gift can result in penalties and interest charges. 

 

Let Us Guide You Through Your Taxes

The gift tax can seem complicated, but it doesn’t have to be. At Nesso Tax, we can help you understand how the tax works. We’ll work hard to ensure that you comply with the law and avoid any costly penalties.

 

At Nesso Group, we can help you file your tax returns and help you with any questions or concerns you may have about gift taxes. Reach out now to learn more about how we can help you. 

 

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