For many couples, Valentine’s Day is an occasion to exchange thoughtful and romantic gifts. So, you probably gave your better half a very expensive piece of jewelry, after all, as Marilyn Monroe says, “Diamonds are a girl’s best friend.” However, if you are unfamiliar with the US tax system, these gifts can cost you more than you think. So let’s dive into it.
A gift tax is a levy imposed when a person transfers property, assets, or money to another individual without receiving something of equal value in return. So, if you made some gifts of large value such as jewelry, a car, vacations, or expensive electronics this Valentine’s Day, make sure you keep good records of the value of the property. But you may be wondering why people make gifts all the time and never worry about this tax. It’s because generally gifts are small in value and typically fall well below the annual exclusion threshold.
Before diving into the world of gift taxes, note that the potential tax imposed depends not only on the value of the property but also on whether the person making or receiving the gift is a U.S. citizen or domiciliary. In this article, we are going to focus on U.S. citizens and U.S. domiciliaries. Stay tuned for more information about foreign persons making gifts in the U.S.
First, it’s important to remember that it’s the gift giver, not the recipient, who pays the taxes. However, the IRS allows individuals to make annual tax-free gifts up to a certain limit per recipient. Currently (2024), the annual exclusion is $18,000 per person. This means that you can give up to $18,000 to any number of individuals each year without incurring Gift Tax. Additionally, U.S. citizens and individuals domiciled in the U.S. have a lifetime exemption that allows them to gift a certain amount over their lifetime without facing taxation. The lifetime exemption amount for 2024 is $13.61 million per person, but this amount is closely linked to estate taxes, meaning that the amount can be used to offset both gift taxes and estate taxes. For that reason, the IRS needs to receive information on how much money you have given during your life. The information is reported by filing IRS Form 709. Of course, certain exceptions apply, such as direct payments of tuition to an educational institution, and there is an unlimited marital deduction for gifts made to spouses.
Unless your gift is so big that you do not really need to worry about gift taxes, just do not forget to file Form 709. However, if your gift is so large that taxes may be due, then please keep in mind that the gift tax is based on marginal tax brackets, and rates range between 18% and 40%
In navigating the complexities of Gift Tax, knowledge is power. Being aware of the annual exclusions, exemptions, and applicable rates empowers individuals to engage in strategic financial planning while ensuring compliance with tax regulations. Whether you are contemplating a significant wealth transfer or making regular annual gifts, staying informed about Gift Tax shades can make a substantial difference in your overall financial strategy.
If you need professional assistance to ensure your approach aligns with the lates regulations and maximizes the benefits available to you, book your 15-minute call here.
