After losing a spouse or longtime partner, it's difficult to look past your grief. However, it's crucial to understand the important and timely decisions you must make regarding your finances and personal estate plan.
The gift tax is a tax on the transfer of assets, cash or property, to another without receiving something of equal value. The asset has to be of a certain value for the tax to apply; otherwise, it falls under the gift tax exclusion, either annual or lifetime. If the gift is above a certain value, you will have to fix out a tax form, but you may still be able to avoid the tax.
The value is based on the IRS definition of “fair market value.” If the asset is cash, then the calculation is straightforward: it is what it is. If the asset is a house, then its value is what someone would pay for it if neither buyer nor seller was under duress to commit. And some things which seem not to be gifts on their face may nonetheless be considered such by the IRS, for example, casual loans to friends and families, or naming someone other than a spouse on a bank account.
The annual gift tax exclusion in 2019 and 2020 applies to assets up to $15,000 in value. It is counted per recipient, meaning you can give up to $15,000 to however many people you like without having to file a gift tax return. It is also per person, so you and your spouse could give up to $30,000 per year without having to file a gift tax return. Note that gifts between spouses are unlimited and don’t generally trigger a gift tax return and that giving money to a nonprofit is a charitable donation and not a gift. Finally, the person receiving the gift usually doesn’t have to report it.
The lifetime gift tax exclusion is how you avoid the tax, even if you give more than $15,000 per year and have to fill out the form. The gift tax return keeps track of the amount you have given. In 2019, the lifetime exclusion was $11.4 million; in 2020, it rises to $11.58 million. As with the annual gift tax exclusion, the lifetime exclusion is per person, so married couples can exclude twice the gifted amount.
The tax only applies once you use up not only the $15,000 exclusion but also the $11 million-plus exclusion. So if you gift someone $50,000 one year, that counts as $35,000 against the lifetime exclusion. If you do manage to use up your exclusions, the rates range from 18% to 40%, paid by the giver.
However, there are exceptions and special rules for how to calculate the tax, which can be found on IRS Form 709. These apply to things like college tuition and medical bills by allowing you to spread one-time gifts across multiple years’ worth of gift tax returns, or to pay the institution directly to avoid the gift tax return requirement.
If you have questions or would like to discuss your personal estate plan, please don’t hesitate to reach out.
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