Gift Tax FAQ

Author: Wolfe Ossa LawCategories: Elder Law

gift tax

As Estate Planning attorneys we are constantly asked about gift tax. Here are some basic FAQs on the subject.

What is the gift tax?

Gift tax is a federal tax on transfers of money or property to other people while getting nothing (or less than full value) in return. Few people owe it; the IRS generally isn’t involved unless a gift exceeds $15,000. Even then, it might only trigger extra paperwork.

Do you pay taxes when you receive a gift?

In most cases, no. Assets you receive as a gift or inheritance typically aren’t taxable income at the federal level. However, if the assets later produce income (perhaps they earn interest or dividends, or you collect rent), that income is likely taxable. IRS Publication 525 has the details. Also, some states have inheritance taxes.

How do I avoid gift tax?

Two things keep the IRS’ hands out of most people’s candy dish: the $15,000 annual exclusion in 2020 and 2021, and the $11.58 million lifetime exclusion in 2020 ($11.7 million in 2021). Stay below those and you can be generous under the radar. Go above, and you’ll have to fill out a form when filing returns — but you still might avoid having to pay any actual taxes.

How is gift tax calculated and how the annual exclusion works

  1. In 2020 and 2021, you can give up to $15,000 to someone in a year and generally not have to deal with the IRS about it.

  2. If you give more than $15,000 in cash or assets (for example, stocks, land, a new car) in a year to any one person, you need to file a gift tax return. That doesn’t mean you have to pay. It just means you need to file IRS Form 709 to disclose the gift.

  3. The annual exclusion is per recipient; it isn’t the sum total of all your gifts. That means, for example, that you can give $15,000 to your cousin, another $15,000 to a friend, another $15,000 to the neighbor, and so on all in the same year without having to file a gift tax return.

  4. The annual exclusion also is per person, which means that if you’re married, you and your spouse could give away a combined $30,000 a year to whomever without having to file a gift tax return.

  5. Gifts between spouses are unlimited and generally don’t trigger a gift tax return. Gifts to nonprofits are charitable donations, not gifts.

  6. The person receiving the gift usually doesn’t need to report the gift.

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