 Personal Finance PowerPoint Presentation Gift Tax Prepare to get financially fit by practicing personal finance. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from Investopedia Gift Tax which you can find online. Take a look at the references resources. Continue your research from there. This is by Julia Kagan, updated March 21st, 2022 in prior presentations. We've been looking at a state planning then focusing in on particular tools and strategies that might be used within a state planning depending on your particular situation. This time we're considering a gift tax. First question, what is a gift tax? A gift tax is a federal tax paid by an individual who transfers something of value to another individual without receiving something of similar value in return. Let's give a quick recap of the timeline that might be put in place when we're doing our estate planning and how the gift taxes could fit within it. So clearly when we're thinking about the time of death and we're planning for it a couple things we would like to have happen. We would like to be able to allocate our assets in accordance with our wishes. We would like to make things as easy as possible on our loved ones at that point in time. We would like to pay as little taxes as possible which really just reverts to point number one being able to allocate our assets in accordance with our wishes. From a tax standpoint the main tax we usually think about in the United States from the federal tax side of things is the income tax. We get taxed when we earn income. When we die then we might be subject to an estate tax. Now the estate tax is going to be a little bit confusing when you think about the income tax as the general taxation because you're kind of taxing in essence the balance sheet. The person dies, you sum up all of the stuff at that point in time, you try to value it and if it's below a certain threshold which is a fairly significant threshold then you might be subject to estate taxes that you'd have to tax on the estate level before distributing then to the beneficiaries. So if someone was going to implement an estate tax and you were a wealthy individual subject to it your knee-jerk reaction would be I'm going to try to keep all of my stuff hoarded until the last second right before I die and then I'm going to give it away to my son or daughter right before I die in the next second when I die the state doesn't get anything because I just gave it away and they don't have anything at that point in time. Well the government of course is going to say well I don't really like that because we're trying to get taxes here so now they've got to make up rules with regards to how much you can give away because they see you giving money away as a wealthy individual as a way to avoid the estate taxes which they're trying to hit you with after you die. So now we've got this interplay between how much you can give away and it's kind of related then to your estate taxes in some ways so that's the general idea so then we've got the question of well what exactly is a gift and generally if you're giving money or something other than money of value to someone else and you're not getting anything in return that's basically a gift right because normally if we give something of value to someone we do so because we're buying something or we're trading for something we're getting something of equivalent value in return that would be a purchase or a transaction not generally a gift obviously then people might try to say well what if I give someone something and I get something of a lesser value in return like you see in charities for example yeah they gave me something they gave me a flower, it's a million dollar flower well obviously the IRS is not going to say that it's a million dollar flower typically they're going to see it as a gift they're going to see it as you trying to as a wealthy person reduce your estate without reporting the gift tax and so on and so forth so that's where the back and forth comes in so once again a gift tax is a federal tax paid by an individual who transfers something of value to another individual without receiving something of similar value in return but remember it's kind of linked to in some ways on the federal side of things the estate taxes as well because gifting something lowers the amount that's in the estate at the point of death so gifts can be anything of significant value such as a large sum of money or real estate and the tax can be imposed even if the person donating never intended it to be a gift so you might say I didn't even think it was a gift I just gave them this well you know the government if you didn't get anything return we're going to call it a gift and so on so the Internal Revenue Service IRS sets limits on how much you've allowed to gift before you must file a return and before you are taxed these annual limits in terms of how much you can gift before being subject to these gift taxes and so on so sums over the annual thresholds are reportable and count toward a lifetime gift tax exemption so you've got this lifetime gift tax exemption for the amount that you have to report that would be over the general thresholds that we'll talk about in a second and that will look familiar because it's kind of linked to then the exemption for the estate taxes so once this generous allowance is exhausted the gift tax becomes taxable so if you go over that exemption which is a large exemption because it's eaten into the to the estate tax kind of thing but again it does have it could have impacts on then the estate taxes at the point of death if you eat into the exemptions okay so how a gift tax works so the federal gift tax was created to prevent taxpayers from giving money and items of value to others to avoid paying income taxes so or possibly to lower the estate value and so on so the gift tax is applied to prevent undue hardship and to oblige donors and recipients to honor their tax liability donors must fill out the federal gift tax return that's the form 709 and submit it along with their annual tax returns by April 15th of the year after the gift was made gift tax rates are based on the size of the taxable gift and can range between 18% and 40% the taxes only triggered on annual gifts above a certain amount with anything below that amount being excluded from the tax so you got the annual exclusion is $15,000 for 2021 and $16,000 for 2022 so if you're under those thresholds then you may not be subject to you know these reporting requirements and so on and so forth and also those thresholds to $15,000 and $16,000 doesn't mean your total gifts for the year they're on a per person basis so if you had $100,000 and you gifted multiple people $100,000 not one of them being over the $16,000 or $15,000 threshold for 2022 or 2021 then you should be okay but if you gave one person the whole $100,000 then you'd be over that threshold would be the general idea so those limits are per recipient meaning you could give several gifts up to $15,000 to $16,000 to different people without triggering the gift tax now note that those seem like fairly good fairly hefty amounts for average individuals but obviously if you're talking about very wealthy individuals or something like that the fraction of $16,000 to you know a billion is fairly small right so that's what they're trying to do is limit the gifts that you could do to lower the estate before the time of death would be the idea so the lifetime exclusion is the total sum you can give over the course of your life so adjusted annually for inflation this exclusion is $11.7 million in 2021 and $12.06 million in 2022 which looks familiar because it's tied to in essence the estate tax exclusion that we've looked at in prior presentations the donor can gift up to this amount before the gift tax is applied meaning you're going over the $16,000 thresholds you're possibly reporting it but possibly not paying taxes at that point until you were to give away money over these fairly large thresholds and again these are large thresholds to be giving money away $11.7 million and $12.06 but if you're eating into those exclusions you may have an impact on your estate taxes being subject to taxes for the estate would be the general idea these things could be linked together possibly so annual limits still apply though which means the lifetime exemption applies to amounts over and above annual exclusions so the taxable amount is over so you've got your table here zero to 10,000 tax on the amount and the first column is zero you've got the rate of tax on excess over the amount in the first column 18% the 20% you've got your basically your progressive tax tables I won't go into detail on that here special considerations form 709 includes calculations for how much gift tax is owed but filing form 709 doesn't necessarily mean that you pay the gift tax so the fact that you have to file 709 means possibly that you paid more than the annual limit but might not mean that you're going to pay the tax because you might be below the lifetime exemption amount right but it might be eating into that exemption with regards to the estate taxes at the point of time that you die possibly exposing you to more estate taxes so if you've given gifts that exceed the annual exclusion maximum 15,000 in 2021 16,000 in 2022 but is still under the lifetime maximum 11.7 million in 2021 12.06 million in 2022 then you won't trigger the gift tax but you still must report the gift there are also a lot of exceptions to the gift tax the following items are generally not subject to gift tax so you got gifts to donors a spouse an unlimited amount can be gifted tax free if the spouse is a U.S. citizen if the spouse is not a U.S. citizen then tax free gifts are limited to an annually adjusted value 159,000 in 2021 and 164,000 in 2022 so you would think then like a spouse to some degree you would think like you would think if you got married you're one financial entity so one spouse gifting to another spouse you would think wouldn't be subject to the same kind of gift tax rules because generally you could think of them and this will be different technically from state to state because it could be community property state and so on but you would kind of think that they're one legal financial entity right so you wouldn't think that there would be a gift tax between the two married individuals generally but that's the general idea so gifts to a political organization it's used medical and educational expenses payments made to a donor to a person or an organization such as a college doctor or hospital gifts to a charitable organization now notice that these kind of concepts a charitable organization political organization gives some outs if someone is saying I'm going to die at some point in time or something like that and I'm trying to give my money somewhere where it's not just going to be completely wasted by the federal government or something like that so they might try to gift to charities and what not if they're able to give more money over the threshold that won't have an impact on their estate taxes right so gifts that are valued so that falls into a state planning strategies depending on different circumstances gifts that are valued at less than the annual gift tax exclusion rate for that year so gifts that trigger gift tax strategies there are strategies for avoiding or minimizing the gift tax these include gift splitting so being married allows you to double your gifts so if you're married again it gets a little bit confusing when we apply these rules because you would think you have two entities that are now one entity but they're also kind of still two entities so you would think that you're going to apply the amount that you can gift can basically be doubled you would think because there's basically two people there instead of one remember the annual exclusion applies to the amount of gift that an individual can give a recipient that means that even if they file a joint tax return spouses can each give $15,000 in 2021 or $16,000 in 2022 to the same recipient effectively raising that gift to $30,000 or $32,000 in a year without triggering the gift tax because they're two individuals in essence this strategy is known as gift splitting or enables wealthy couples to give substantial annual gifts to children grandchildren and others this gift can be on top of say tuition paid directly to a grandchild's school or college which is exempted outright from the gift tax so if you you know you have a strategy that you're trying to give a substantial amount of money to a certain individual then you've got the doubling effect if you have the married couple and you might be able to pay for things that the individual is using possibly like college or school or something like that which could be a way to gift without having the same tax implications so gift and trust donors can give gifts in excess of the annual exclusion without paying taxes by establishing a special type of trust the the crummy trust is the usual arrangement to receive and distribute the funds so now we've got this concept of trust coming into play again remember we've seen trust in prior presentation we can kind of think of them in essence as a separate legal entity similar to a corporation and they have some characteristics of like we usually apply to human beings like owning property and so if we put money into the trust then you can use the trust to try to be achieving a certain goals and depending on the estate planning strategies the trust can get somewhat complicated but you're usually walking the line between are if it's are you giving the money to the trust do you still have control over the money in the trust or is the trust being set up and you don't have basically control a substantial control over the trust could have some implications as to whether the trust is going to achieve the goals that it's looking to achieve so the gift tax exclusion usually doesn't apply to money distributed by trust but a crummy trust allows the beneficiary to withdraw the assets within a limited time period say 90 days or 6 months this gives the beneficiary what the IRS calls a present interest in the trust and this sort of distribution can qualify as a non-taxable gift of course the recipient can only take out a sum equal to the gift given to the trust so examples of the gift tax here are a couple examples of how the gift tax works let's say taxpayer a gives $100,000 to five individuals in 2021 $20,000 to each so $100,000 total given $20,000 to each individual because the annual exclusion limit is $15,000 per person $25,000 of the total amount given is not excluded and reduces the lifetime exemption amount so after making these gifts taxpayer a has $11.675 million remaining of the exemption to give before paying gift taxes here's another example in 2021 grandmother who wants to encourage her granddaughter's education pay $20,000 for a year's tuition that same year she also gave the young woman $15,000 for books supplies and equipment neither payment is reportable for gift tax purposes the tuition is excluded outright and the $15,000 is the maximum amount allowed under the annual exclusion if grandmother sent the future physician $30,000 and the young woman already paid the school then the grandmother would have made a reportable but not taxable gift of $15,000 $30,000 less the annual exclusion of $15,000 which would reduce her $11.7 million lifetime exclusion by $15,000 what's the bottom line the gift tax is a federal levy that applies when you give to another individual or individuals without charge a sum of cash or assets either tangible or intangible that have intrinsic worth so it is imposed on the donor rather than on the receiver however the gift tax has been revised in such a way that very few people end up actually paying it numerous types of gifts are exempted including anything to a spouse in addition you can give an eight figure sum over the course of your life before the gift tax is triggered and even then it applies to the amount above that threshold