The transfer of property, cars, or money to any individual without receiving an equal value or more in return is considered a gift. While New Jersey does not have a gift tax, per se, the IRS does impose one, under most circumstances. The gift tax may apply when making gifts during your lifetime (gift tax), or when making bequests under your will (estate tax). When planning your estate, it’s important to know the potential gift tax implications and methods to reduce or avoid gift tax liabilities. Our experienced team at Mariano & Coiro, P.C. is here to answer your questions and help you navigate this difficult area of the law.
What is a gift tax?
Let’s start by explaining what gift tax is and what it entails. First, when applicable, the gift tax is paid by the person making the gift (the “donor”), rather than the person receiving the gift (the “donee”).
Next, it is critical to note that making gifts of money or property to your spouse is completely FREE from any gift tax (or estate tax) liability, regardless of the amount. However, when making gifts to anyone else, even your children or grandchildren, the IRS limits you to a maximum gift of $16,000 per year, per donee (under current law), without any gift tax. But, when you gift any individual property or money that is valued at more than $16,000, you are required to report the gift on the United States Gift Tax Return IRS Form 709, and pay the corresponding gift tax. The gift tax is very expensive, as it can be between 18% and 40%, depending on the size of the gift.
Nevertheless, just because you have to report a gift over $16,000, doesn’t mean you are necessarily required to pay a gift tax. The IRS has set limits on what triggers a tax bill, based on your total lifetime gift-giving amounts. If the gift distribution throughout your lifetime has exceeded $12.06 million or $24.12 million for couples (under current law), you will have to pay a tax, but only on the amount that exceeds the limit. For example, if the limit is $12.06 million, but over a lifetime, you distributed $12.1 million in gifts, you would owe a gift tax only on the $40,000 excess.
Keep in mind that selling assets under their fair market value will also be considered is a gift, at least to the extent the fair market value exceeds the actual sale price. For example, if you sell someone a house that is worth $125,000 for $100, the IRS will treat you as though you gave the buyer a gift of $124,900. You would have to report this amount on Form 709, and either pay the tax, or have it count against your maximum allowed lifetime gift-giving total.
Methods to avoid the gift tax
- Avoid giving gifts of over $16,000 per year to any one individual.
- Instead of gifting money directly to an individual for, say, their medical bills or tuition obligations, pay their bills directly to the institutions.
- Split a large gift that exceeds $16,000 over several years. For example, this method permits you to gift someone $16,000 in December, and then another $16,000 immediately in January of the following year, totally free of any gift tax or reporting.
- Because the gift tax is subject to change from year to year, sometimes more complex arrangements such as an irrevocable trust may help you avoid unexpected, additional gift tax liabilities in situations where you want to make regular gifts to any one person.
Gifting money or assets can be a generous offer to someone you love and wish to help. However, blindly doing so without understanding the complex gift tax implications may place you in a very precarious financial situation. The best way to protect yourself and your heirs from an unexpected tax bill or other IRS complications is to discuss your plans with an experienced attorney, like the ones at our office. We have been helping people with their gift-giving and general estate planning for over 36 years. Reach us by email or phone at 732-860-7620.