Answers to Common Gift Tax Questions
When you give the perfect gift, you want to bask in the recipient’s excitement—not fill out a gift tax return. I know there’s a lot of confusion around the gift tax, especially around the holidays. Federal gift tax law does require certain gifts to be reported and taxed, with the onus on the giver. Fortunately, gift taxes aren’t relevant in 99 percent of gift exchanges. Here’s everything you need to know.
What is the Gift Tax?
The gift tax is a federal tax on transfers of property in which the person who makes the transfer doesn’t receive fair market value for the property. (In other words, person A gives person B something without person B paying for it.) This isn’t something most people need to worry about before handing out birthday or holiday gifts. Because of the annual gift tax exclusion —more on that below—this tax only kicks in when you make significant transfers.
In addition to the federal gift tax, states may also impose their own gift taxes. Connecticut is currently the only one to do so.
Who Pays the Gift Tax?
Generally, the person who gives the gift (the donor) is responsible for paying any required gift tax. The person who receives the gift (the donee) only pays the gift tax if they have made a special arrangement to do so. So if you want to present a loved one with a car or other high-ticket gift, the tax obligation will generally be yours.
Connecticut’s gift tax law applies when the person giving the gifts lives in Connecticut at least part of the year.
What Counts as a Gift?
The IRS takes the position that generally, any gift is a taxable gift. Both money and tangible property count as gifts. The use of property and the right to receive income from property are also gifts. To test whether you’ve given someone a gift, ask yourself: Did I receive something of equal value in return? If not, the IRS probably considers this a gift.
Political contributions, and tuition and medical expenses that you pay for someone else, are not considered gifts for tax purposes. You do not owe gift taxes on gifts you give your spouse as long as your spouse is a U.S. citizen. (If your spouse isn’t a citizen, you may owe taxes on gifts that exceed $159,000, in 2021. Gift tax issues can be thorny for noncitizens, so I advise families in this situation to consult an attorney with specific questions.)
What’s the Gift Tax Exclusion?
The reason that you don’t have to file a tax return after every birthday party is the annual gift tax exclusion. This element of gift tax law says that you don’t have to pay any taxes on the first $15,000 you gift to any one person in any one year. (The exclusion amount is subject to change year by year, but stays at $15,000 for 2021.) The exclusion amount is the maximum you can give to any one recipient. You can make multiple gifts of $15,000 to different people in a year without triggering the tax.
If you’re married and you and your spouse are both citizens, you can combine your annual gift exclusion amounts. Together, you may gift up to $30,000 to any one recipient without owing a gift tax.
How Do I Pay Gift Taxes?
When you give more than $15,000 in taxable gifts to any one person in any one year, file Form 709 with your tax return in the next year.
What Else Do I Need to Know?
I advise Massachusetts residents to consider their future gift-giving plans as part of the estate planning process. As you may know, Massachusetts has its own estate tax with a low exemption threshold of $1 million per person. If a resident dies with an estate that’s valued above that threshold, the estate will have to pay taxes before the remaining assets can be distributed to any heirs.
Here’s why gift giving matters. Massachusetts law says that an estate owes the estate tax if its gross value, plus adjusted taxable gifts, exceeds $1 million. Let’s say Mary gives her son and daughter each a gift of $25,000, files her gift tax return and later dies with an estate that includes $975,000 in assets. That $50,000 in taxable gifts would be added in, tipping her estate over the $1 million threshold and triggering the estate tax. She may have been able to help her kids and preserve her assets if she had discussed her options with an estate planning attorney first.
Those are the basics on the gift tax, but I know that more specific questions may come up for you as you think about giving gifts to your loved ones. Contact me with any questions around gift taxes and estate planning.
Julie Ladimer is the founder of Ladimer Law. She has been helping people complete their estate planning since 2014. She has been named a Rising Star by Super Lawyers three years running and received a Boston Magazine Five Star Professional award.