The Gift Tax is a federal tax on the transfer of ownership of property at less than fair market value. In other words, if you give something to someone and you do not receive sufficient consideration, or value, in return, you most likely have made a gift. For example, if you were to transfer your house to your child for $1, this would be considered a gift. The donor, or the person giving the gift, is responsible for the taxes. If this sounds a bit unfair to you (maybe it sounds like double taxation), there’s good news. You will most likely never have to pay this tax, no matter how much of your property you give away. Why is that?
There are two important “exemptions” to be pointed out when discussing the gift tax. First, there is an annual exemption. Currently, this exemption is $15,000 per donee, meaning that you can give $15,000 or less to as many people as you want without incurring any tax burden. In fact, if the gift is $15,000 or less, you have no obligation to even file a gift tax return with the IRS. If you gift property worth more than $15,000 to one person, you will have to file a gift tax return, but there’s an important caveat here: the lifetime exemption. Unless you have exceeded the lifetime exemption, you will not be obligated to pay any gift tax on that transfer. The lifetime exemption currently sits at $11,400,000. In other words, you can gift up to $11,400,000 worth of property during your lifetime and incur NO gift tax liability. So unless your estate totals more than $11,400,000 and you give it ALL away, you’ll never have to worry about gift taxes. So why does it exist at all?
Before the 1920s/30s, there was an estate tax but no gift tax. The estate tax exemption was relatively low, which meant that the estates of wealthy individuals would be exposed to estate tax liability. Recognizing this, these individuals would often make gifts of their property during their lifetime, thereby removing the gifted property from their estate when they passed. In turn, the US government was losing possible tax revenue. To prevent this practice, the US government implemented the gift tax and made it a percentage of the estate tax rate. The purpose of this was to incentivize individuals to take advantage of the lower gift tax rate, providing the US Treasury with immediate tax revenue during the Great Depression. Simply put, the US Government recognized that individuals had discovered a way to avoid paying estate taxes by making lifetime gifts and closed the “loophole” with the gift tax.
In sum, the gift tax is a federal tax imposed on lifetime transfers of property at less than fair market value. The annual exclusion is currently $15,000 per recipient with a lifetime exclusion of $11,400,000. Again, no tax is due unless total gifts equal more than $11,400,000 in value. Of course, whether gift tax is due after the transfer of an asset is only one consideration when contemplating a transfer. There are other things to be mindful of, such as capital gains tax implication and, if nursing home care is a concern, whether the transfer will disqualify the transferor from receiving government benefits.
Please feel free to contact Lantz Law if you’d like more information or would like to schedule a consultation.