A gift is either money, assets, or an item that you give to someone else for nothing in return, or for something less than fair market value. Each person can give a certain monetary amount to an individual each year without being taxed, but if you go over that amount, you may be subject to the gift tax.
Giving a Gift and the Gift Tax
A gift can be given to family, friends, or to a charity for which you can benefit from tax deductions. This could be a monetary gift or asset such as a car or house to your children.
As of 2019, the maximum annual gift amount without having the gift tax kick in is $15,000 per individual and $30,000 for a married couple giving joint funds. There is also a lifetime gift exclusion amount of $11.4 million. This annual limit only applies on a per-person basis, so you can give gifts of $15,000 to as many individuals as you want each year.
Once you go over either limit, you will be subject to the gift tax for any amount over those maximum limits. If you happen to go over your annual limit because you gave a house to someone, you will be responsible for reporting it to the IRS. They will not tax you immediately though. They will only subtract this amount from your lifetime exclusion of $11.4 million. If you exceed the $11.4 million, the tax rates range between 18 – 40%.
If your estate has a value over the federal estate tax exemption (2019 is $11.4 million), you will be subject to taxes to any amount over that. For example, if you have not used any of your gift tax exemption throughout your life, and still have $11.4 million worth of exemption, and your estate is worth $12.4 million, when you pass away and your estate is given to your heirs, $1 million will be subject to the estate tax because the estate value was above your lifetime gift tax exemption amount.
As the individual receiving the gift, you are not required to report it as income since the person giving the gift is responsible for any tax implications.
Setting up an estate plan with a qualified estate planning lawyer can help you avoid any possible estate or gifting taxes. An organized estate plan will establish annual gifting to ensure you’re giving the maximum amount allowed to qualified charities and non-profits while reducing your taxable estate.