Gift tax represents the taxes that are made on either property or money that you have gifted over your lifetime. These are placed on gifts that have been given to anyone while you are still alive, though they only apply to gifts that are of a certain value.
This tax was created as a way to deter taxpayers from giving everything away prior to death as a means to circumvent payment of federal estate taxes.
In 2015, you are able to gift as much as $14,000 either in the form of cash or in assets to anyone you should like on an annual basis and there is no necessity to pay federal gift tax on this amount.
For couples, you can gift up to $28,000 each year to each recipient.
As an example, if you as an individual gifted someone a sum of $19,500, your federal gift tax liability would be $5,500. In which case, you must fill out a gift tax return.
As another example, you opted to pay medical school tuition for a granddaughter and you offered $15,000 for this – paid directly to the medical school. There is no federal gift tax to pay as this is exempt.
Any gift that is made over and above the annual exclusion is subject to federal gift tax. In which case, IRS Forms 709 or 709A must be filed.
Gifting Over the Acceptable Annual Exclusion
If you are to go over and above the yearly gift tax exclusion, there is no subjection to gift tax on account of the $5.43 million estate tax and lifetime gift exclusion.
These two exclusions – the estate tax and lifetime gift exclusions – are known as “unified credit.” Thus, every gift you have made or left within your estate is untaxed to the point that they reach the limit of $5.43 million.
Nevertheless, the IRS has no desire to wait for your death until they learn about your taxable gifts. As such, you are required to file a return as by way of reporting those taxable gifts on a yearly basis. In essence, this means you keep a running tally of all gifts, while subtracting any gift tax that is owed.
Unified credit that is not used over your lifetime against gift tax is then available to reduce federal estate taxes. Over your lifetime, if you make taxable gifts that amount to $5.43 million, your level of unified credit is now used, which means that upon your death, federal estate tax will be paid on your estate.
Federal Gift Tax Payment
Gifts that are worth over the annual exemption amount of $14,000, as it currently stands, to a single person in a single 12-month period are known as taxable gifts and thus they potentially generate gift tax. Irrespective you give a single gift of $14,000 or you give gifts of $1,000 to 14 individuals, these gifts of a “future interest” are still perceived as taxable gifts. On the other hand, with respect to a spouse who is a citizen of the U.S., an unlimited gift value can be made.
Should you go above the limit of $14,000 per year per person, you must report the gifts to the IRS in Form 709.
A gift tax is generated by taxable gifts. However, no gift tax is due unless you are to give away more than $5.43 million over the course of your lifetime.
Gifting More than $14,000
You may gift a sum of up to $14,000 (which is known as an annual gift tax exclusion) or below within a single calendar year to as many people as you wish without the requirement for the filing of a gift tax return.
A spouse may receive unlimited gifts and there are no tax consequences. This gift tax exclusion will be indexed on an annual basis, meaning that you are at liberty to gift larger amounts with no gift tax concerns.
Any gifts that are more than $14,000 are considered to be taxable gifts and these should be reported annually on a gift tax return, which is Form 709. Even though you must file, you do not need to pay the federal gift tax since it can be offset through the use of estate tax and unified gift tax exemptions.
If you have any doubts about your situation with respect to gift tax, get in touch with a tax attorney in the Rochester NY area.