This article is about taxes on gifts made during life, not about taxes that may apply to gifts made after death. The rules – and their effect on beneficiaries – are different.
You may be the type of person who likes to give until it hurts. But you probably don’t like it when things start hurting your pocketbook. And with the gift tax, you could end up giving money not just to the people and organizations you love, but to the IRS as well.
In this article, we’ll explore gift taxes and how much you can give away before the tax collector comes knocking.
Gift Tax vs Inheritance Tax
Neither California nor the federal government levies inheritance taxes, meaning that the gift recipient does not have to pay any taxes on inheritances received when someone dies and leaves assets to you.
However, Californians are subject to the federal gift taxes (there is no state gift tax). The gift tax is a tax you have to pay if you give beyond a certain amount during your lifetime.
What Counts as a Gift in California?
The IRS defines a gift as virtually any transfer of cash or other assets to someone else without receiving something of value in return. For example, you might give:
- The balance of your bank, brokerage, or retirement accounts
- Stocks, bonds, and other securities
- Jewelry, art, and other collectibles
- Real property, like a home or investment property
- A loan with no interest or low interest
That last one, no- or low-interest loans, can catch people off guard, but it’s important. Let’s say you are a high-net-worth person and you make a loan to a friend to help them buy a home. If you charge less interest than the IRS federal rate limit, that loan would be considered a taxable gift.
What About Gift Tax Exemptions?
There are two main types of exemptions to be aware of: the annual gift tax exemption and the lifetime gift tax exemption. They work together.
Annual Gift Tax Exemption
For 2022, the annual gift tax exemption is $16,000 per individual. This means you can give $16,000 to your son, $16,000 to your daughter, and $16,000 to as many other individuals as you want without worrying about the gift tax.
However, if you give more than that limit to any person, then you would need to report it on IRS Form 709. This does not necessarily mean you have to pay tax on the gift immediately. What it means is that everything you give to that person beyond the annual limit will count against your lifetime gift tax exemption.
Lifetime Gift Tax Exemption
As of 2022, the lifetime gift tax exemption is $12.06 million. This means you can give that amount during your lifetime without incurring gift tax. The amount doubles for married couples.
You can give up to $16,000 per recipient every year without its counting against your $12.06 million lifetime exemption. But as mentioned above, if you give someone more than this, then you need to report the excess and the excess will count against your lifetime exemption.
In addition to the annual exemption, several other types of gifts do not count against your lifetime exemption, such as:
- Tuition you pay for someone else directly to the school
- Medical expenses you pay for someone else directly to the medical provider
- Gifts to your spouse (if your spouse is a US citizen)
- Gifts to qualified charitable organizations
When You Exceed the Lifetime Exemption
Once you give so much that your entire lifetime exemption is used up, then any excess is subject to the federal gift tax.
Engage in Careful Tax Planning With the Help of a Qualified Lawyer
Tax and gift planning is best accomplished as part of other estate planning activities. Your giving strategy should be developed in light of your personal situation, the existence of trusts, charitable giving goals, and more.
At the Law Office of Janet L. Brewer, we help clients navigate the ever-changing tax landscape. We can help you optimize your giving strategy to maximize your impact on others and minimize your tax exposure.
Please call 650-325-8276 or contact us online to schedule a consultation at our Palo Alto or Los Altos offices.
