Updated: Jan 6
During our lifetime, you always want to give the best things to your beloved ones. And while sending valuable gifts to your spouse, family, and friends, you may face some unexpected financial consequences in the process like taxes on gifts.
The federal government imposes a gift tax of up to 40% on transfers of property from one person to another. And if your gift exceeds a certain value, you may have to file a gift tax return and pay the gift tax.
What is the gift tax?
Gift tax is a federal tax that may apply when someone transfers a large amount of money or property to other people and receives nothing in return.
In some cases, the use of a property or income from a property may trigger gift taxes. Selling something at a greatly reduced value compared to its full market value could also be considered a gift.
Except for money and real estate, gifts could be other assets, such as stock or vehicles.
On the other hand, there are plenty of gifts that won’t be applied to the gift tax. These include:
Tuition or medical expenses paid on someone else’s behalf
Gifts to your spouse
Gifts to a political organization
Gifts to a charitable organization
Who pays the gift tax? Does the receiver of a gift pay tax?
Generally, an honor is responsible for filing a gift tax. However, the recipient may agree to pay the taxes on gifts in some situations. In that case, you should speak with a tax professional to make a special arrangement.
The annual and lifetime gift tax exclusion
In 2022, the IRS will apply the annual gift tax exclusion at $16 000 and the lifetime gift tax exclusion at $12,06 million for a single taxpayer. Stay below these numbers, the federal gift tax rate doesn’t involve. Go above, you’ll have to fill out a gift tax form when filing returns.
How the annual gift tax exclusion works
In 2022, you can give someone a gift up to $16 000 in value in a year without filing the taxpayers.
If you give more than $16 000 in cash or assets in a year to someone else, you need to file a gift tax return.
The annual exclusion applies for a single taxpayer, which means if you’re married, you and your spouse could give away the gift up to $30 000 a year without having to file a gift tax return.
The gift tax doesn’t involve gifts between spouses, gifts to charitable organizations.
How the lifetime gift tax exclusion works
In 2022, you get a $12,06 million lifetime exclusion. And similar to the annual gift tax exclusion, it’s per person, so married couples can exclude double that in lifetime gifts.
What is the gift tax rate?
The gift tax rate applies once you surpass your exclusion. The rate you’ll pay depends on the value of gifts subject to taxes. At the present, the gift tax rate ranges from 18% to 40%. Let’s review the rate you’ll pay for certain gift amounts:
We understand the difficulties of running a small business and balancing a fulfilling life outside of work. We want to make the same thing easy for you. Let Irvine Bookkeeping handle your Tax while you run your business successfully. Get A Free Initial Consultation.