Avoiding Gift Taxes In Your Estate Planning
Although California has no estate tax, there is a federal estate tax. And although that estate tax has a rather high exemption limit–currently you won’t pay estate taxes unless your estate is worth over $12 million–many people want to avoid the estate tax by just giving property away.
Can You Just Give Your Stuff Away?
This all seems reasonable. If someone inherits property, they (could possibly) pay estate taxes–so give it to them before they can inherit it. When you pass, the value of your estate is lowered, possibly under the threshold to pay estate taxes.
But Uncle Sam is one step ahead of you. You, even as the giver of the gift, may have to pay what are known as gift taxes on what you give away to others. That can make simple gifting a bit more complex than it sounds when it comes to estate planning.
Exemptions for the Taxes
The good news is that there are some exemptions that don’t get taxed when they are gifted. This means that you can gift all you want under these categories, or under these amounts, tax free. They include:
-Gifts to political organizations
-Tuition paid for someone else
-Medical expenses paid for someone else
-Any gifts to your own spouse, regardless of purpose or value
-Gifts to certain nonprofit charities
-Any gift you make to anyone for any purpose, up to $16,000 as of 2022, although that number does change periodically.
The $16,000 Yearly Exemption
However, the good news with the $16,000 yearly gift tax exemption is that it is not total–it is per recipient. So, conceivably, you could give $16,000 to as many different people as you wanted to, without triggering the gift tax. And that $16,000 doubles to $32,000 for married couples.
However there is a lifetime maximum that you can gift tax free. The current maximum is just over $12 million, so even if you are under the gift tax exemption amount all the time, every year, if you hit this number in total, your future gifts will be subject to the gift tax.
Every time you give a tax-free gift, it “eats into” or counts against your allotted lifetime exemption allotment.
Exceeding the Limit
If, in a given year you exceed the $16,000 yearly gift tax exemption limit, you don’t immediately pay taxes on the excess amount. You will have to report the excess gift to the IRS, but the IRS won’t immediately tax you or the recipient on the excess amounts; it will just count the excess against (reduce that amount from) your lifetime $12 million exemption limit.
The good news, if you do end up owing a gift tax is that the tax is graduated; at the maximum the tax can be 40%, but in most cases, the tax percentage will be much less than that-often around 18%.
If you do gift something to someone that isn’t an exemption listed above, it is possible that the IRS can look to whomever received the gift, to get the tax payment.
Taxes can affect your estate plan. Call the Torrance will attorneys at Samuel Ford Law today for help.
Sources:
irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
nerdwallet.com/article/taxes/gift-tax-rate
