Gift Tax Basics 2019 | Who Owes Tax

Gift Tax Overview for Filing 2018 taxes

Congrats, you got a large gift check last year. If you’re like many folks, you may wonder if you need to report that money or owe a gift tax.

Gift Tax Basics

Givers May Owe a Gift Tax, Not Recipients

Surprisingly, if anyone must pay a tax on the gift, it’s the giver, not the recipient. This tax applies to the value of all gifts (cash, stocks or even a car).

While it might seem counterintuitive that the IRS taxes the giver, the agency has an underlining reason for the tax. The Government wants to make sure that wealthy taxpayers do not use gifts as a way around estate taxes.

Gift Limits

Each year, the IRS announces the ceiling amount of allowable tax-free gifts. Taxpayers can gift up to the limit without needing to file a gift tax return. In 2018, the amount was $15,000. While the IRS has not yet announced the amount for 2019, many expect the limit to remain the same.

Each person in a marriage can use the exclusion individually. Therefore, a married couple can give each child $30,000 without needing to pay a gift tax.

Lifetime Exclusion

In addition to the annual limits, the IRS also limits the amount individuals can gift over their lifetime.  For the tax year 2018, the unified estate and gift tax limit is $11,180,000. The agency currently plans to index this total for inflation through the tax year 2025.

The IRS calls the lifetime exclusion a unified tax because it combines gifts over the individual’s lifetime with the amount passed at death through the taxpayer’s estate. If the individual’s estate is below the unified gift and estate tax limit, the estate will not owe estate taxes at the time of death. On January 1, 2026, the lifetime limit will revert to $6,000,000.

Use Timing Strategies to Max Gifting

Givers can use timing if they plan to give an amount above the allowable ceiling. For example, assume a couple wants to help an adult child make a $60,000 down payment on a home purchase. With some prior planning, the couple can spread the gift in two $30,000 gifts over two tax years and not need to file a gift tax return.

Gift Tax Portability

Since 2010, estate tax law allows the surviving spouse to make use of the deceased spouse’s unused lifetime estate and gift tax exclusion (DSUE) amount. The deceased spouse’s estate must be below the lifetime exclusion limit.

To take advantage of this portability, the surviving spouse must file a timely estate tax return for the decedent even when the IRS does not require it. With this technique, a married couple can pass up to $22,360,000 tax-free to their heirs.

Who Needs to File Gift Tax Forms

If you give a large gift, which exceeds the annual limit, you must file Form 709. Very likely, you will not owe any tax. You must file this form so that the IRS has a record of your extra gift amount, which the agency can deduct from your lifetime exemption.

Gifting can be a great way to transfer wealth. If you need advice on tax filings and requirements, please contact us.

If you are still working on completing your 2018 taxes, make sure you check out our overview on the 2018 changes to personal tax deductions.

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