Do I Need to Pay the Gift Tax?

The estate tax and the gift tax are basically two sides of the same coin. Congress instituted the gift tax in 1932 to stop people from giving all of their property away in an attempt to avoid paying the estate tax. While gifting valuable assets may come with tax consequences, it is an important estate planning tool worth considering.

If you give something away, transfer it or sell it for less than its actual worth, the IRS may consider this a gift if it meets the value threshold. A financial advisor or estate planning attorney can explain if you owe the tax or if you are exempt.

Exemptions to the Gift Tax

According to the IRS website, any gift is subject to taxes unless it meets one of the following four exclusions:

1. It is less than this year’s annual exclusion

   In 2015, the exclusion is $14,000. If the value of your gift is less than $14,000, you do not owe taxes for this gift. If you and your spouse want to give away a gift together, it must be below $28,000 to qualify for the exemption in 2015. Even if you jointly give a gift below $28,000, you need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return to make it clear that you and your spouse agree to gift-splitting.

2. Tuition or medical expenses

   Helping someone cover his or her education costs or hospital bills would exclude you from paying the gift tax. Keep in mind that you must pay the medical facility or school directly: giving someone money with the intent of it going towards those costs is not sufficient.

3. Gifts to your spouse

   You can give any amount of money to your spouse and avoid paying the gift tax. Your spouse must be a US citizen to qualify for this exemption.

4. Gifts for non-profit organizations or charitable use

   You can donate money to a charitable or non-profit organization and avoid paying the related taxes. This exemption also applies to promotional use: if you give extremely valuable gifts away at for publicity (a popular talk show host giving away cars to her studio audience, for example), then the tax burden falls on the recipients since their wealth has increased.

The Lifetime Gift Tax Exclusion

There is a way for you to give gifts in excess of $14,000 a year without paying gift taxes. You qualify for this exemption if you give less than $5,340,000 over the course of your lifetime. This could ultimately affect your estate tax, however, so it is best to speak with a financial consultant or estate planning attorney to determine the best way to proceed.

Filing a Gift Tax Return

If you do not meet any of the above exemptions, you must complete and file Form 709 mentioned above. If you need more time, you can file Form 8892 (Application for Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax) to apply for a six-month extension. If you received an extension for your income tax Form 1040, you should also receive an extension for Form 709. Note that this is for informational use only, always speak with a qualified tax professional and an attorney to be sure your taxes are calculated and filed properly.

For more information, speak to an estate planning lawyer to learn more about the options available to those in your situation.