The Gift Tax Made Simple – TurboTax Tax Tips & Videos

overview If you make bombastic enough gifts to relatives or friends, you might owe the federal giving tax. here are the basics on how the giving tax works. For information on the third gear coronavirus relief package, please visit our “ american Rescue plan : What Does it Mean for You and a third Stimulus Check ” blog post .

 
Friends giving gifts at a baby shower.

The gift tax only kicks in after lifetime gifts exceed $11.7 million in 2021

The first thing to know about the federal gift tax is that giving givers—not giving recipients—have to pay it. thankfully, you won ’ triiodothyronine owe the tax until you ’ ve given away more than $ 11.7 million in cash or other assets during your life .

  • The lifetime exclusion was raised to $11.7 million in 2021.
  • If you’re married, your spouse is entitled to a separate $11.7 million in 2021.

so, actually owing the gift tax is not a concern for most folks. But you may still have to file gift tax returns even though you don ’ metric ton owe any tax .

The annual gift tax exclusion provides additional shelter

The annual federal give tax exception allows you to give away up to $ 15,000 each in 2021 to as many people as you wish without those gifts counting against your $ 11.7 million life exemption. ( After 2021, the $ 15,000 excommunication may be increased for inflation. )
Say you give two favored relatives $ 20,000 each in 2021 and give another relative $ 10,000. The $ 20,000 gifts are called taxable gifts because they exceed the $ 15,000 annual excommunication. But you won ’ t actually owe any giving tax unless you ’ ve exhausted your life exemption come .

  • Assuming you haven’t, the two taxable gifts simply reduce your lifetime exemption by $10,000
    • ($20,000 – $15,000) x 2 = $10,000.
  • The other gift of $10,000 is ignored, because it’s below the $15,000 annual exclusion for 2021.

If you give three individuals $ 15,000 each in 2021, these gifts are ignored because they don ’ t exceed the annual exception .

Gift taxes and estate taxes are connected

You have a $ 11.7 million federal estate of the realm tax exemption for 2021. You can leave up to that sum to relatives or friends free of any federal estate tax. If you ’ rhenium married, your spouse is entitled to a separate $ 11.7 million exemption .
Gifts made during your life will reduce your taxable estate. however, gifts in excess of the annual exception besides reduce your estate tax exemption .

  • In the earlier example, the two $20,000 taxable gifts made in 2021 would reduce your estate tax exemption by $10,000 to $11,690,000 ($11,700,000- $10,000), based on the recently enacted changes in estate law.
  • The separate $10,000 gift in 2021 and the three $15,000 gifts in 2021 would not reduce your estate tax exemption.

Bottom line: Making annual gifts up to the exclusion ( $ 15,000 in 2021 ) is a good direction to reduce your taxable estate of the realm without any negative slope effects.

Special rule for 529 plan contributions

Contributions to a 529 college savings plan are gifts to the future student. however, a particular rule allows you to make a lump-sum contribution and spread it over five years for endowment tax purposes .
For case, you can contribute $ 75,000 in 2021 to jump-start a 529 college savings account for your child. If you ’ ra married, your spouse can do the lapp .

  • You can spread the gift over 2021-2024 without incurring any gift tax and without reducing your $11.7 million lifetime gift tax exemption or your $11.7 million estate tax exemption.
  • Your spouse can spread his or her $75,000 gift over five years as well.

The only caveat : You can ’ metric ton make any extra gifts to the lapp recipient during those years without using part of your $ 11.7 million exemption .

Some gifts are tax-exempt

Among others, the comply types of gifts are exempt from the federal endowment tax. You can make outright gifts in these categories without any gift tax or estate tax consequences and without having to file endow tax returns :

  • Gifts to IRS-approved charities
  • Gifts to your spouse (assuming he or she is a U.S. citizen)
  • Gifts covering another person’s medical expenses, as long as you make the payments directly to medical service providers
  • Gifts covering another person’s tuition expenses, as long as you make payments directly to the educational institution. (Payments for room and board, books, and supplies don’t qualify for this exception, but you can cover those costs by making a direct gift to the student under the annual exclusion.)

You may need to file a gift tax return

If you make a taxable give ( one in overindulgence of the annual exclusion ), you must file Form 709 : U.S. Gift ( and Generation-Skipping Transfer ) Tax Return .

  • The return is required even if you don’t actually owe any gift tax because of the $11.7 million lifetime exemption.
  • The return is due by the tax filing deadline, typically April 18, 2022, of the year after you make the gift—the same deadline as Form 1040.
  • If you extend your 1040 to October 15, the extended due date applies to your gift tax return too.

If you ’ rhenium married, you can ’ thymine file a roast endow tax render. Each spouse must file a separate return if he or she makes any taxable gifts. You can, however, choose to “ split ” gifts with your spouse. Making a divide gift allows you to take advantage of your annual giving tax exclusion plus your spouse ’ mho ejection for a endow that is made wholly by you .
For case, say you gave $ 30,000 to your child in 2021. By treating it as a disconnected giving, you can completely shelter the give with your $ 15,000 ejection plus your spouse ’ sulfur $ 15,000 exception.

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  • That way no gift tax is due.
  • The gift doesn’t reduce the $11.7 million lifetime gift tax exemption in effect for 2021 or the estate tax exemption for you or your spouse.

If you choose to make a rent endow, you must file Form 709, and your spouse must consent to the placement .

A bigger story

This article only covers the basics of federal give taxes. For more information, see IRS Publication 950 : introduction to Estate and Gift Taxes. See besides the instructions for Form 709 .
Remember, with TurboTax, we ‘ll ask you simple questions about your life and aid you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no count what your situation .

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