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It's Christmas time. The holiday season is upon us, and so is the season of giving. Gift-giving is a wonderful way to show your appreciation to those you love, but are you aware that there is such a thing as gift taxes? By federal definition, a gift is something of value transferred to another individual. Gift taxes are federal taxes paid by the individual that gives the gift.
Gifts that are taxed usually have a significantly high value. Money, cars, or homes are considered gifts that need to be taxed. The recipient of the gift can be subjected to paying taxes if the person donating didn’t intend for it to be a gift. Of course, not every gift qualifies as one that must be taxed. The IRS sets limits on how much you’re able to give another person before paying federal taxes.
What you should know about gift taxes.
Some highlights that you should remember when giving a high-value gift are:
a. Anything above IRS limits is taxed (annual and lifetime exclusions are implied).
b. The Gift tax range is from 18% to 40%.
c. A Gift tax is a federal tax.
d. Gifts given to spouses, political organizations, charity, or used for medical and educational expenses are excluded if the gift is valued at less than the annual exclusion amount.
e. To avoid the gift tax, gifts must be split or given in trust.
Why do gift taxes exist?
To prevent taxpayers from giving items to others as a means to avoid paying taxes, the federal gift tax was created. It also aids in preventing undue hardship, as it obliges the donor and recipients to honor their tax liability. IRS Form 709 is the federal gift tax return that donors must complete and submit with their annual returns.
How do gift taxes work?
Rates for gift taxes are based on the size of the gift. You only have to worry about paying the tax if the amount of the gift exceeds $15,000 for 2021, or $16,000 for 2022. If you plan on giving a gift that exceeds $15,000 this year, then you must file Form 709 during the 2022 tax season.
The limit is per person, rather than per gift. You are able to give gifts up to $15,000 to multiple people without incurring a gift tax.
While you don’t have to pay gift tax on charitable donations, you may qualify for a deduction when you file. This can put money back in your pocket when you receive a refund.
If you find yourself with tax debt due to gift tax, or other tax penalties, call Flat Fee at (866) 747-7435 for a free consultation!