All About Gift Tax
One of the most common topics we are asked about as CPAs is that of gift tax. Though a significant majority of clients we see are not required to pay any gift tax, many of them do end up with the requirement to file a gift tax return for certain years. In the case that gift tax is actually due, it is paid only by the giver/estate, never by the recipient/inheritor.
In general, all transfers of cash or property are considered gifts, aside from these specific exceptions, in which the amount transferred is exempted entirely:
- Gifts paid as tuition directly to an educational organization
- Gifts paid directly to a provider for medical care
- Gifts made directly to a political organization
- Gifts to one’s spouse
- Gifts made directly to charitable organization
Each year, an individual may gift up to $16,000 to an individual without any reporting requirements. If any gifts over that threshold are made, then a gift tax return is required to be filed. The $16,000 applies to each recipient separately. For example, if an individual gifted $10,000 in one year to each of his 5 grandchildren, they still would not need to file a gift tax return since none of the recipients individually received over $16,000.
In the case that gifts to an individual for the year are over the threshold, the amount over $16,000 then reduces the giver’s lifetime gift exemption, which for 2022 is $12.06 million. Once the lifetime exemption amount is entirely exhausted, then each gift made is subject to the gift tax. For example, if an individual gifted each of their 5 grandkids $50,000, they would file a gift tax return to report that their lifetime exemption was reduced by $170,000. (50k–16k for each gift x5)
The gift tax and estate tax are one in the same. Thus, the remaining lifetime exemption is an important consideration when it comes to estate planning. A decedent’s estate is only subject to gift/estate tax if it is in excess of the remaining exemption. For example, if an individual that had $8 million of exemption remaining passed away and left an estate worth $10 million, $2 million of that would be subject to the gift/estate tax.
For married taxpayers, there is an opportunity to treat gifts as a split between both spouses. This allows for each spouse’s $16,000 annual exemption to be used. If one spouse gifts $20,000 to an individual, then they can elect on the gift tax return to treat the gift as $10,000 coming from each spouse. The return is still required to be filed, but neither of their lifetime exemptions are reduced. If the gift is originally given from a joint account or was property jointly owned by both spouses, then no return needs to be filed if the gift is under $32,000.
It is imperative that records are kept of any significant gifts made each year, so we can ensure you are in compliance with gift tax requirements. If you have any questions about gifting or gift and estate taxes, please get in touch with a member of the Kimble team.