Money Conversations: Does Your Gift Come with a Tax Form?
If you ever had to give a large gift, did you know there are tax implications involved in this transaction? This article does not concern the routine gifts such as small personal items, souvenirs or small sums of cash. Rather we will talk about the situations when larger amounts of cash, property ownership rights or financial instruments such as stocks, bonds, mutual funds, etc. are transferred from one individual to another.
According to information provided by IRS, the gift tax was introduced in 1924 and completely enacted in 1932 to minimize the estate and income tax avoidance. “The gift tax rate schedule was set at 75% of the rates prevailing under the estate tax,” reports David Joulfaian who works at the US Department of Treasury in his paper “The Federal Gift Tax: History, Law, and Economics.” This was done on purpose to accelerate the gift transfers by the wealthy to lock in a lower tax rate and create an influx to the “cash-strapped treasury” at the time. Initially the gift tax rate ranged between 0.75% to 33.75%. Today this tax rate ranges between 18 and 40% depending on the size of the gift.
Most likely you will never have to pay a gift tax, but filing appropriate forms is a must. The general rule is if your gift amounts to less than $15,000 per year to any particular person, you do not have to even report it. That means you can give $15,000 to your sister, $15,000 to your aunt and $15,000 to your child without reporting it. However, if you give more than $15,000 to one particular individual in a year, you have to file a gift tax return (IRS Form 709) to report the excess. This includes gifts in the form of cash, financial assets, any land and property. Just because you had to report it does not mean you will have to pay the tax. Once you file your tax return, the amount of the gift will be added to the lifetime exclusion amount which came up to $11.7 million in 2021. So unless you ever exceed that amount, you don’t have to worry.
Just a few things to clarify here: Gift between married spouses are unlimited. Gifts to pay for college tuition and medical bills may also be excluded as long as they were paid directly to school or health care provider. Gifts to charitable organizations are considered a donation and may even be tax deductible. If a married couple gives a joint gift of $30,000, they would still have to file Form 709 to properly split the gift.
In the situation where cash is gifted, only the giver is responsible for the tax forms. However, if the gift was an asset which may accrue value, the recipient might also have to report it and pay capital gains tax. For example, if shares of stock were gifted and the recipient sells them at a higher price than was originally purchased by the giver, he/she will have to report this transaction on the tax return and pay tax on the gain. Also, “Frequently, you see people give their homes away to their kids,” noted Paul Joseph, attorney and CPA from Williamson, MI in his interview with US News and World Report on June 8, 2020. “That could result in a significant capital gains tax for children if they sell the property. A home that is inherited, rather than gifted, may avoid this tax burden.”
Sometimes gift events can occur without ever triggering a thought about filing proper tax forms. For example, contributing to a 529 plan, paying for your child’s wedding or honeymoon/vacation, buying cars for your grandchildren or even adding a non-spouse family member to your bank account. Interest-free loans to family members or friends are also subject to gift tax rules. Here is one good advice: never make assumptions about your gift taxability. In his October 2018 article “The Gift Tax Return Trap And How To Avoid It,” Bob Carlson, a senior contributor to Forbes Magazine recommends: “Consult an estate planner or go to the IRS website at www.irs.gov and take a look at Form 709 and its instructions to see if you need to file a [gift] return.”