Why the Gift Tax Exists
Gift taxes exist because of the federal estate tax. If your estate is large enough that federal estate taxes will be owed upon your death, the IRS wants to make sure it collects those taxes one way or another. The gift tax ensures that people cannot avoid the federal estate tax simply by giving away their assets prior to death.
Who Has to Pay Federal Gift Taxes?
Gifts are always tax-free to the recipient. Federal gift tax rules only apply to the giver and only come into play if you exceed the annual gift limits.
What Are the 2018 and 2019 Gift Limits?
The annual gift limit is $15,000 per individual recipient per calendar year for 2018 and 2019. You can give that amount to as many individuals as you wish without being required to pay gift tax. It does not matter if the individual is related to you or not.
In other words, a gift of $15,000 or less that is given to one person will not have any gift tax or estate tax implications. Separately, your spouse may also give $15,000 to anyone they want.
Non-cash gifts are valued at their current fair market value. For example, if you originally paid $5,000 for a painting or 100 shares of stock, and the item is worth $15,000 at the time you transfer the gift, the IRS considers the value of the gift to be $15,000.
What Happens if I Exceed the Annual Gift Limits?
If the total value of your gifts to any one individual in one calendar year exceeds the annual limit, you must file a federal gift tax return using IRS Form 709. This is separate from your federal income tax return but is due at the same time.
A separate Form 709 must be filed by each individual who gives an over-the-limit gift; spouses cannot file one joint Form 709 the way they file a joint income tax return.
However, just because you have to file a federal gift tax return does not mean you will actually have to pay any taxes at that time. You can choose to apply over-the-limit gift amounts to your federal estate tax exclusion. In essence, rather than paying the gift tax now, you defer the taxes until your death when the final estate tax return is filed.
If you opt to pay gift taxes at the time you file a gift tax return, the tax rate starts at 18% and goes as high as 40%. These rates are substantially lower than current estate tax rates, but again, the laws can change dramatically from year to year.
Ultimately, most people will not owe any federal estate taxes upon their death, so it is often preferable to avoid paying gift taxes early.
What Happens at Death When My Estate is Settled?
A federal estate tax return must be filed only if the fair market value of your total assets at the time of your death plus the sum of all pre-death taxable gifts exceeds the IRS “basic exclusion” amount. The IRS basic exclusion amounts are $11.18 million for 2018 and $11.4 million for 2019.
Of course, it is possible that the estate tax threshold could be reduced in future years. For example, if you had died in 2017, the estate tax exclusion was just $5.49 million.
These complexities are a good reason to work with a highly skilled tax and estate planning attorney to develop a comprehensive estate plan.
Please note that the information in this article applies only to federal tax law. Consult your financial and legal advisors regarding applicable Illinois estate and gift tax laws.
Consult a Schaumburg Tax and Estate Planning Lawyer
Many people find great pleasure in giving generous gifts to their family members sooner rather than later. However, to avoid creating an unnecessary tax burden, talk to a knowledgeable Arlington Heights gift tax and estate plans attorney at Drost, Gilbert, Andrew & Apicella, LLC. Call 847-934-6000 to schedule an appointment; there is no charge for an initial consultation.
About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.