What Is The Gift Tax And How Much Can You Gift Tax-Free?

What Is The Gift Tax?

The gift tax is a set of tax rules around gifting. Annually, you can give $15,000 tax-free in 2020. If you go over $15,000, you still don’t owe taxes until your lifetime limit is reached. That limit is $11.58 million for 2020. That’s up from $11.4 million in 2019.

The lifetime limit receive a big increase in 2018, going from $5.49 million to $11.18 million. The lifetime limit continues to increase each year. Unless you're giving millions of dollars away, you're not likely to ever pay taxes on your gifts.

Note: the total limit may (and likely will) go down in the future with future tax reform.

It should be noted that gifts to certain entities are already tax-free. These include:

Who Pays Gift Taxes?

The person gifting pays taxes and files necessary paperwork when going over the $15,000 limit. The person receiving the gift does neither.

Gifting For Married Couples

Married couples generally have a combined tax return (here's when you should consider filing separately). Each of them is subject to the $15,000/yr limit. In other words, the IRS does not look at a married couple of one entity and limits them to $15,000 in total. Instead, their combined total is $30,000.

There is a method called splitting the gift that applies to married couples. For example, the father wants to gift $30,000 of property to his son. However, that’s $15,000 over the annual limit. The father goes to his wife and asks her to be a consenting spouse. In doing this, the wife basically hands over her $15,000 to the husband. Now the husband can gift $30,000 without reducing his lifetime limit.

Gifting Portions Of An Estate While Living

Let’s look at an estate planning example. John owns an estate that is worth more than $11.58 million. When John passes, his heirs will be subject to a 40% estate tax, at the federal level, on the amount above $11.58 million. What can John do to reduce the taxable amount of his estate?

Instead of gifting the majority of his estate on death, John can gift while he’s alive. $15,000 per person might not sound like much, but if John can gift to many people each year, it will add up fairly quickly.

There’s an additional benefit to giving while you're alive. By giving while you’re alive, you not only reduce the potential taxable amount of your estate, you’ll get far more joy out of it than if you were dead. You get to see the impact you gifting has on people’s lives. Think if you give $15,000 every year to a nephew who keeps saving for college and eventually earned his degree? You’ll know you played a big part in that.

Gifting Stocks While Living

Gifting stocks is just the opposite. Say a stock goes from $50 to $100. Anyone who inherits the stock upon your passing gets a $100 cost basis because of the step-up basis. If you gift it while alive, their cost basis will be $50. They pay a $50 long-term capital gain tax on each share. Not exactly a good deal.

Gift Tax Limit Workarounds

If the annual gift tax limit is $15,000, what does that mean when you want to gift to multiple people or give more than $15,000 to one person? The gift tax limit is per person, per year. So if you want to gift to three people, the total combined limit for all three is actually $45,000.

What if you want to gift $40,000 to one person? We already know you’ll hit the $15,000 limit. However, if your time frame allows, you can gift $15,000 near the end of the year and another $15,000 at the beginning of the following year. That’s a total of $30,000 to one person and it's almost as if they received the full $30,000 at once. Only $10,000 out of $40,000 now goes toward your lifetime limit.

You can take the above example even further. After gifting $30,000, if the person can wait one year, you’ll be able to gift the remaining $10,000 tax-free, assuming you haven’t gifted more than $5,000 during that year.

Final Thoughts