Giving Large Gifts? What You Should Know About Taxes
Do you want to leave a legacy for friends, family, or a worthy cause while still being able to watch them enjoy your gift? If so, then you are among the increasing number of Americans who choose to gift money or assets to others during their lifetime rather than as part of their estate.
Before you start giving away your money, you'd do well to learn a little about how to avoid an unwelcome tax bill from your generosity. Here are a few key points to know about the tax consequences both now and in the future.
The Gift Tax
When a person makes a financial gift to another, they are technically subject to the federal gift tax. The recipient is not responsible for paying any tax on the gift. The reason that most Americans aren't aware of the gift tax is that exclusions cover most gift amounts that are passed between individuals. But large gifts may require further tax reporting.
Gift Tax Exclusions
Gift tax exclusions come in four main categories. The first, and most common, is the annual exclusion offered to all taxpayers. As of 2020, the first $14,000 you gift each individual is excluded from taxes. This can be doubled for a couple who files joint taxes.
In addition, you can choose to apply some other routine gift tax exclusions. Most gifts between spouses are excluded from taxation and so are qualifying charitable contributions. Tuition or medical expenses paid directly to the provider are also generally excluded.
The Gift Tax Return
What happens if your gift doesn't fully qualify for an exclusion? Then you will likely need to file Form 709 with your federal income taxes. The Gift Tax Return is mandatory if gifts to anyone don't exceed the exclusions. You would report the entire value of the gift(s) during the year, claim the exclusion, and report the remainder for tax purposes.
Gift Tax Credits
If you do pay gift taxes in any year, your estate can use this to offset potential taxes upon it after you pass away. The Applicable Credit Amount includes a base tax credit allowed for gifts by the estate and allows it to claim an additional credit for gift tax paid during the taxpayer's lifetime. To claim this, you should keep good records of all large gifts and Forms 709 you file.
Do you want to know more about how to account for large gifts to others? If you're contemplating such a donation, start by meeting with an experienced accountant or tax preparer in your area. The extra tax preparation will help you give these gifts without worrying about taxes.