The Gift Tax: Giving Until It Hurts, And It Will
It’s bad enough that the federal government has the audacity to tax your family at 55 percent on the assets you leave them when you die (assets you’ve already paid income and capital gains taxes on during your lifetime). You would think that taking 80 percent of everything you have acquired would be enough. You would be wrong. Another tax, known as the gift tax, will tax you at a rate of 45 percent on any asset transfers you make during your lifetime.
The gift tax excludes transfers between married couples, since the husband and wife can transfer as much as they want to each other. How generous of the federal government to allow you to transfer assets to a person with whom you probably already share ownership of the assets.
Each year, anyone can transfer $13,000 in cash or assets to anyone else without tax consequences. You can walk down the street and hand out $13,000 to every person you meet and you’ll be fine. However, every dollar you give to anyone over $13,000 will be taxed at 45 percent. If you want to buy a car for your teen, and the car is valued at $20,000, you must complete a gift tax form and pay the federal government $3,150 in taxes for that year.
If you want to buy a house for your daughter as a wedding gift, and the house is valued at $150,000, you must pay a gift tax of $61,650. Even if you’re paying for the house monthly, through a mortgage, the federal government won’t wait. You will owe the entire $61,650 on that year’s tax return.
By the way, an easy way to get around this particular event would be to buy the house as an investment property for yourself and rent it out to your daughter for $1,000 per month. So you could give him $1,000 a month in rent and avoid taxes even if the total gift would be only $12,000 a year.
There are three main exceptions to the gift tax rule. You can give as much money as you want to your spouse without any taxable event. A husband and wife can transfer billions of dollars between them and the government won’t care. This allows us to transfer assets for estate planning purposes. You can also donate as much money as you like to a legitimate IRS-recognized charity that has filed a Form 501(c)(3) and been approved as such.
The third exception to gift tax is that you can donate money or assets for legitimate educational expenses or legitimate medical expenses. Many seniors can successfully reduce their outstanding estate tax by giving their grandchildren a college education through 529 plans or prepaid college programs.
The gift tax is a nasty tax in the sense that it imposes a penalty for being generous. There are many ways to limit the amount of gift tax you will be required to pay during your lifetime. Only a few of those ways were briefly mentioned in this article. For a complete summary of all the ways you can limit the taxes you pay during life and after death, you should consult with a trained Florida estate planning attorney.