Are you concerned about who pays gift tax?
Gift tax is a tax you pay when you transfer assets to someone else. The asset can be cash. The asset can be real estate, stocks, or bonds. All of these transfers may trigger gift tax. We are not talking about a small gift, like a toy or birthday present. We are talking about large transfers of assets.
A gift tax is a type of transfer tax. The tax is payable by the person making the gift, in the calendar year the gift is made. A gift tax is owed if the gift is transferred while the person making the gift is alive. An inheritance tax or an estate tax is owed if the gift is transferred after the person making the gift dies.
Not to panic. There are credits, I call them coupons you can use even though you make a large gift while you are alive. If you plan right and get good advice, the coupons usually lower the gift tax to zero. If you don’t use your coupon, the potential amount of gift tax is 40% of the fair market value of the gift by the person making the gift. Ouch.
The coupons are credits against gift tax. There are many types such as, annual exclusion, education, and medical coupons. There is also a special coupon when you give to grandchildren which is called a generation skipping transfer tax coupon. There is also the big exemption.
Annual Exclusion Coupon
The coupon that people use most often is the $15,000 coupon. The rule says that in any given calendar year, you can give up to $15,000 to any person you want, and not owe gift tax. So, if you want to give 10 people gifts of $15,000 each, you will not owe gift tax. If you give $150,000 to any one person, you may owe the tax unless you can find another coupon.
The Education Coupon
The next coupon is a gift for education. If you give money directly to a college or university for the benefit of a loved one, the gift tax coupon is unlimited. That means you can pay the school $150,000 for tuition, room, board, fees, books and etc., and there is no taxable gift. But there is a catch. If instead of giving the school the money, you give your loved one the money, the education coupon won’t work. You must give the money directly to the school.
The Medical Coupon
Another coupon is for medical and health related expenses. Many people have loved ones who live in nursing homes, or they may have very large medical bills. If you give the money directly to the nursing home, hospital, or other health care provider, the gift tax coupon is unlimited. That means you can pay nursing home $150,000 and there is no taxable gift. But, if you give it to your loved one instead, you can’t use this coupon.
The Generation Skipping Transfer Tax Coupon
The term Generation Skipping Transfer Tax Coupon is a mouthful. This type of gift is a gift to someone more than one generation younger than you…like a grandchild. This coupon makes certain that there is no gift tax, or generation skipping tax, on gifts to the younger generations. This coupon is really big. The amount of this coupon for 2021 is $11.7 Million Dollars. Be careful though, this amount has grown over the years, and may be going down. Also, there is a BIG warning here. If you don’t give the gift outright, or just the right way, the generation skipping transfer tax coupon may not apply.
The Big Exemption
The big exemption is the coupon that protects you against paying gift tax to anyone, not just your younger loved ones. This coupon travels up and down with the Generation Skipping Transfer Tax Coupon, right now. There have been many years in the past, where the amounts were different. So right now, the amount of this coupon is also $11.7 Million Dollars. This coupon applies to gifts given while you are alive and to gifts which are given after your death using wills and trusts.
The Tax Return
There is a special tax return which has to be filed, if you make a taxable gift, even if the coupon reduces the tax to zero. This tax return is called, Form 709, United States Gift and Generation Skipping Transfer Tax Return. This return looks nothing like an income tax return, and you will need a special accountant or tax attorney to prepare this return for you. Don’t even think about preparing this tax return yourself.
It All Adds Up
Many years ago, before I became an attorney there were two separate types of transfer tax. So, if you gave away everything you owned before you died, you didn’t pay estate or inheritance tax. That is because you owned nothing at death. The laws do not work that way anymore and haven’t worked like that for many years. Today the government adds up all the taxable gifts you have made during your lifetime, to the amount of assets you still own when you die.
So, if you give $7 Million Dollars away, while you are alive, and still have $7 Million Dollars when you die, you or your loved ones could be paying tax on $7 Million plus $7 Million which equals $14 Million Dollars. Double ouch.
Do you need help making gifts to your loved ones?
I haven’t seen it all. This is complicated stuff. If you need help, find a qualified attorney to help you.
Do you know what kind of death certificate you need?