Gift Tax and What You Should Know About It
Federal gift taxes are imposed on gifts of property or money made while the giver is still alive. The giver is subject to the gift tax. Although the recipient is not required to pay the gift tax, other taxes, such as income tax, may apply. On the other hand, the federal estate tax applies to property transmitted to others (other than a spouse) after a person's death. The federal estate tax has an effect on the decedent's estate and may significantly limit the amount accessible to heirs.
While each donation is taxed in principle, there are a few significant exceptions. For instance, donations of tuition or medical expenditures paid directly to a medical or educational institution on behalf of another person are not taxed. Gifts to a spouse who is a United States citizen, to a qualified charity organization, and to a political group are also exempt from the gift tax.
Generally, you are not required to submit a gift tax return unless the total gifts to a recipient exceed the calendar year's annual gift tax exclusion. The Tax Cuts and Jobs Act of 2017, which became law on December 22, 2017, raised the gift tax to $15,000 in 2018. The gift tax will increase to $16,000 in 2022 (from $15,000 in 2021). Annually, the exclusion amount is adjusted for inflation. Each beneficiary is subject to a separate exclusion. Additionally, presents made by couples are handled individually; hence, each spouse may make a gift to the same recipient up to the yearly exclusion limit. Additionally, spouses may opt to share presents, in which case any gifts made throughout the year by either spouse are recognized as being made half by each spouse. This facilitates the use of both spouses' yearly gift tax exclusions. To share presents with your spouse, however, you must submit a gift tax return.
Gift taxes are calculated by adding the tax on all gifts given during the tax year that exceed the yearly exclusion amount to all prior years' gift taxes. This sum is then deducted from an individual's relevant lifetime exclusion amount. If the total amount exceeds the lifetime exclusion, gift taxes may be due.
The 2010 Tax Relief Act reunified the estate and gift tax basic exclusion amounts at $5 million (indexed for inflation), while the 2012 American Taxpayer Relief Act permanently increased the exemption amount while raising the estate and gift tax rate to 40%. (up from 35 percent in 2012). The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, is the most recent significant piece of tax legislation. In 2018, the federal estate tax exclusion was raised to $11.18 million under the Tax Cuts and Jobs Act (indexed annually for inflation). The federal estate tax exemption will increase to $12.06 million in 2022 (from $11.7 million in 2021). Exclusions are projected to restore to their pre-2018 levels in 2026.
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