Calculation of the Federal Gift Tax
Gift tax is the tax applied when one individual gives property to another and receives nothing, or less than the value of the property, in return--whether or not it is intended as a gift. Giving someone a substantial monetary or asset gift typically means that they (and you) will have to know what kind of taxes are going to be applied to the gift. This can be complicated because there are different rules for different types of gifts. For instance, if you will an asset or a monetary gift to a loved one, the gift will be subject to your death tax as well as their gift tax upon receipt. If you’re simply giving a monetary gift to someone, in many cases there will be an initial gift tax as well as the unearned income tax when they file their yearly income tax return. There may also be state taxes imposed in addition to, or instead of, federal taxes.
The first thing to note when considering gift taxes is that gifts up to $15,000 are exempt. It is also important to note that certain other gifts may be exempt as well, such as the payment of tuition directly to an academic institution or the payment of medical bills directly to a health care provider.
When gift tax is due, however, the amount owed in gift taxes is determined by assessing the fair market value of the gift minus deductions. Once this value is assessed, the IRS imposes taxes equal to a percentage of it, which can vary from year to year. In certain instances, for example, there are rules that entitle the IRS, as well as the state revenue commission where you live, to take upwards of 45% of the gift given in taxes. However, the gift tax is part of the unified federal gift and estate tax. So, for the most part, the gift tax is not paid until after you die when your federal estate tax is calculated. Any property left behind in your estate plus your lifetime taxable gifts are tallied and tax paid if the combination of the two exceed $11.4 million in 2019 (the 2017 Tax Cuts and Jobs Act increased the lifetime exclusion but only through 2025, after which the exclusion reverts back to 2017 amounts-- those figures are adjusted annually for inflation).
The best plan when considering giving a substantial gift to someone, or when receiving a gift, is to speak with a tax attorney to find out the best legal means for gifting, receiving, and reporting the gift to both the IRS and the state revenue commission. An income tax attorney will help to ensure that there aren’t any legal ramifications as a result of the gift, as well as help to decrease the amount of taxes the gift is subject to.