From investments to income changes, there are a variety of situations that you need to consider in the tax planning process. You may, however, have overlooked one crucial factor—gifts. Although generosity, like virtue, is its own reward, it’s often taxed. Here's a closer look at what you need to know about the impact of gift taxes. 

A Guide to Gift Tax

What Is It?

When you give money or property to someone without receiving any sort of service or payment, it qualifies as a gift in the eyes of the Internal Revenue Service (IRS). If the transfer of capital exceeds a certain value, then a gift tax is applied—up to 40% of the gift’s cash total or market value. The donor is responsible for paying the tax, but the recipient could face out-of-pocket expenses if the giver fails to pay. 

What Are the Exclusions?

The IRS offers both an annual and lifetime gift tax exclusion—an amount an individual can give without being taxed. The total amount allowed varies per year, but for 2019, the annual exclusion is $15,000, and the lifetime exclusion is $11.4 million. If you don't surpass these limits, you don't have to worry about the gift tax during your tax planning process. 

What Does & Doesn't Qualify?

Any transfer of property over the exclusion is taxable, including cars, houses, and jewelry. Interest-free loans are also viewed as gifts. Note that qualifying circumstances don't always require a full transfer. If you add a relative (not a spouse) to a bank or investment account, for example, you may face taxes. 

Paying for college or medical bills is less straight forward. Typically, if  money is paid directly to an institution, like a university or hospital, it bypasses the gift tax. But additional forms may need to be filed with the IRS if you transfer money for college or medical expenses to the person first. Additionally, gifts exchanged between spouses and transfers to nonprofits are exempt from the tax.

From income to gift taxes, avoid surprises this upcoming tax season with the help of William G. Molitor, CPA. Since 1990, their tax planning professionals have assisted residents and businesses across St. Charles County, MO, with their financial goals. Learn more about this family-owned accounting service online, or request a personalized consultation today at (636) 926-0502.