What is the Gift Tax and Who Pays It?
The gift tax is a 40% tax imposed upon lifetime gifts which exceed the unified lifetime exemption. Currently the lifetime exemption is ~12 million in 2022 and set to be reduced to ~6 million in 2026. The tax is imposed if, during your life, you gift more than 12 million dollars in the aggregate. The 40% tax is imposed on the amount exceeding the current lifetime exemption amount.
The gift tax itself does not affect a large segment of the population, however, the IRS does require you to report any gift over the annual exemption amount of $16,000 annually per person in 2022.
You may want to consult with a lawyer so you have a good understanding of your obligations if you exceed the annual exemption as you will need to file a Form 709 and use up some of your lifetime exemption.
You will need the services of an expert attorney if you are planning on using lifetime gifting as part of your estate tax planning. Lifetime gifting is a powerful tool used to reduce one’s estate taxes. Speak to a Chandler gift tax attorney today for help reducing gift and estate taxes.
What is the Unified Exemption and How Does it Work?
The unified exemption is the total exemption amount one can give away both during life, in death, and free and clear of the generation skipping tax. The IRS imposes three types of taxes on transfers for less than fair market value. The gift tax, the estate tax, and the generation skipping tax.
The gift tax is imposed on lifetime gifts exceeding the exemption. The estate tax is imposed on your estate if it exceeds the lifetime exemption minus any lifetime gifts which used up some of your lifetime exemption. The generation skipping tax is imposed on any transfers (while living or after death) which transfers assets to a skip generation. A skip generation is anyone significantly younger than you such as your grandchildren.
What is the Annual Exclusion? Do I Have to File a Gift Tax Return?
The annual exclusion is a carve out from the IRS which allows people to give gifts without fear of using up their lifetime exemption or requiring filing a gift tax return. The annual exclusion is indexed to inflation, but only in increments of 1,000. It is currently 16,000 as of 2022.
In order to qualify for the annual exclusion, the gift must be of a present value. This means you can’t gift a promise to give $16,000 in 2025, it must be immediately usable by the transferee. The exemption applies to each transfer from person to person, meaning a donor may gift $16,000 to each of her grandchildren and her spouse may likewise do the same. If you have any questions about how this works, you should contact a knowledgeable attorney for guidance on how the present value rule works for annual gifting.
Fully Deductible Gifts
While some practitioners consider charitable donations and gifts to spouses exemptions, they are technically deductions of the gift tax. However, they are more similar to an exemption in that these gifts do not require the filing of a gift tax return. As such, we are able to freely gift unlimited amounts to our spouses and to charities.
How Does the IRS Know if You Give a Gift? What if I Fail to File a Gift Tax Return?
Our tax system is based on self reporting. However, the system works quite well and there are auditors whose job it is to find unfiled gift tax returns. So long as your estate plus any lifetime gifts remain under the unified exemption in place at your death, no gift tax will be owed. However, if your estate is above the threshold or close to it, the auditor will ask your personal representative about any lifetime gifts. It is at this point where your lifetime gifting will come into question.
If you don’t file a gift tax return, it falls upon your personal representative or executor to file the missing gift tax returns. By failing to file the returns as required, you are making your personal representative’s job that much harder.
What is Form 709 and How is the Gift Tax Calculated?
Form 709 is the gift tax form. It is filed annually if required. The gift tax is calculated by first removing the total amounts of annually exempt gifts and fully deductible gifts, then taking the total of non-exempt gifts for the year, and then subtract that amount from the lifetime exemption. If you have used up your lifetime exemption, a 40% gift tax is imposed upon all gifts above the exemption.
Do I Need a Gift Tax Lawyer?
If all you are doing is making annual gifts to the people you love and care about, then you don’t need a lawyer so long as you stay below the annual exemption. You may want to consult with a lawyer so you have a good understanding of your obligations if you exceed the annual exemption as you will need to file a Form 709 and use up some of your lifetime exemption.
You will need the services of an expert attorney if you are planning on using lifetime gifting as part of your estate tax planning. Lifetime gifting is a powerful tool used to reduce one’s estate taxes. Speak to a Chandler gift tax attorney today for help reducing gift and estate taxes.
