When are you required to pay tax when making a monetary gift?

[Lot249]

What is the name of your state? New Jersey

I'm getting conflicting information regarding the gift tax.
I understand the person making a monetary gift is the person taxed, not the recipient, as long as it is identified clearly as a gift.

On one hand, I am told a maximum allowable amount of $15000 can be gifted to an individual in any one year without any tax obligation.
On the other hand, I'm told a gift tax would only be assessed on those gifted amounts after the total lifetime maximum of 11 million dollars, for any one individual, has been met.

Assuming the above statements are true, the $15000 maximum per year makes no sense to me. If you were fortunate enough to afford to gift someone this amount each year, it would take you over 700 years to get close to 11 million dollars.

So, the question is, how much can be gifted to an individual in one year without the gifter having to pay tax on that gift?

As always, thank you for your time and attention to this matter.

 

[Zigner]

On one hand, I am told a maximum allowable amount of $15000 can be gifted to an individual in any one year without any tax obligation.
On the other hand, I'm told a gift tax would only be assessed on those gifted amounts after the total lifetime maximum of 11 million dollars, for any one individual, has been met.

Your first statement is not correct. A gift of over $15,000 would trigger a reporting requirement, but not a tax obligation. Once you exceed the lifetime exclusion amount, there would be a tax obligation.

 

[adjusterjack]

So, the question is, how much can be gifted to an individual in one year without the gifter having to pay tax on that gift?

$11,000,001. Then you would have to pay gift tax on the dollar.

The $11,000,000 is the exclusion on which you pay no tax.

 

[Zigner]

$11,000,001. Then you would have to pay gift tax on the dollar.

The $11,000,000 is the exclusion on which you pay no tax.

$15k

Edit: Wow, I misread those "millions" as "thousands".

 

[Taxing Matters]

So, the question is, how much can be gifted to an individual in one year without the gifter having to pay tax on that gift?

First, note that the term for the person making the gift is the donor, and the person receiving the gift is the donee. It is the donor that has the obligation to pay any gift tax on the gift. For the donee the gift is not taxed under gift tax nor is it income for federal income tax either. However, the donee might have to pay the gift tax if the donee fails to do so because of the gift tax lien that gives the IRS the ability to go after the donee for it if the donor can't pay it.

There are two parts to the way gift tax works. The first part is that there is an annual gift tax exclusion that excludes from the tax the first $15,000 (currently) that he donee gives during the year to each individual. The donor must add up the value of all the gifts he or she gives to each person during the year (including birthday gifts, holiday gifts, etc) to determine if that $15,000 amount is reached. For example, Homer could make total gifts to his kids of $15,000 to Bart, another $15,000 to Lisa and still another $15,000 to Maggie and all those gifts would be excluded from gift tax entirely.

The portion of gifts made to any one individual that exceeds $15,000 is called a taxable gift. So, for example, if Homer makes total gifts to Lisa this year of $25,000 then the first $15,000 is excluded from gift tax entirely and $10,000 is the taxable gift. This is where the second part of the gift tax comes into play. Once the donor has a taxable gift to at least one person during the year he or she must file a federal gift tax return, Form 709. So Homer would have to file gift tax return for that taxable gift to Lisa. That return is due the same day that income tax returns are due. Note that the $15,000 gift tax exclusion amount changes periodically due to inflation. The IRS announces in the fall each year what the various inflation adjustments are, and every couple of years the exclusion amount increases.

But just because Homer has to file a gift tax return does not mean that Homer will have to pay any gift tax this year. The tax law provides each U.S. citizen with a lifetime unified credit against federal gift and estate tax. This credit current stands at $11,580,000 for 2020. So what happens is that taxable gifts first reduce the amount of this credit. It is only when this credit is fully used up that there is tax on taxable gifts made. So Homer would file his gift tax return for the $10,000 taxable gift to Lisa. If he's never used up any of his unified credit then what happens is that he reduces his $11,580,000 unified credit by the $10,000 taxable gift, leaving him with a unified credit of $11,570,000 to use for future gifts. That then becomes the credit available to use going forward into the following year.

Any part of the unified credit that is not used up during Homer's lifetime will be able to be used to apply against the federal estate tax. So if Home expects that his estate might have assets of around $11 million (or over $5 million after 2025 when the 2017 tax act expires) he will want to plan his gifts carefully to avoid using up as much of that credit as possible.

There is an unlimited gift tax deduction for gifts made to your spouse, so you can give as much as you want to your spouse and never pay any gift tax. There may still be a need to report some gifts made to a spouse, however.

Gifts made to persons two generations or more under you (grandchildren, great grandchildren, etc) or any person more than 20 years younger than you may also be subject to generation skipping taxes (GST), too. The rules are somewhat similar for GST tax, and this tax is also reported on Form 709.

Note that only gifts of a present interest in property qualify for the $15,000 annual gift tax exclusion. Most gifts are gifts of a present interest, but some kinds of gifts are gifts of a future interest, like most gifts made to a trust. The entire amount of a gift of a future interest is a taxable gift.

Note too that the rules are a bit different when the donor is not a U.S. citizen.

This is a very brief overview of the gift tax and if you plan to make large gifts (i.e. gifts totaling more than the annual exclusion) or gifts of a future interest you may want to see a tax attorney for advice to make sure you are making the best use of the exclusion and unified credit, and that you are complying with the rules for filing the Form 709. The rules for gift and estate tax can get complex.

$15k

Jack's short answer was nearly correct (though the unified credit is currently $11,580,000, not $11,000,000 as he stated), as I explained above in much more detail. While the first $15,000 of gifts to each person during the year have no gift tax consequence at all, gifts over that amount don't result in actual gift tax to pay until the lifetime unified credit is exhausted, and that means that one may currently make $11,580,000 of taxable gifts in his/her lifetime and still pay no gift tax. Only once total taxable gifts exceed that unified credit amount is there any actual gift tax to pay.

 

[Zigner]

Jack's short answer was nearly correct (though the unified credit is currently $11,580,00, not $11,000,00 as he stated)

Yep - I misread his numbers.