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Gift Tax: An Overview

When making plans for how their estate is to be handled, many people try to avoid taxation as much as possible and simplify probating the assets whenever they can. There are several strategies you can employ to accomplish this. Placing property in trust is one way of ensuring it transfers easily. Another way property owners often streamline the estate planning process is by making gifts. Here is some background information to get started if you are considering going this route.

Gift tax vs. estate tax: what’s the difference?

In estate planning law, gift taxes and estate taxes are very closely linked. Very few Americans have to worry about estate taxes—the federal exemption is $5.49 million, meaning individuals with estates worth less than that value do not owe federal estate tax. Even if estate tax is not a concern for you, it is still very useful to learn the taxation rules surrounding gifts as you prepare for the probate process.

What is the exemption for gifts?

If a person receives a gift of less than $14,000 in a calendar year, there is no tax owed on that income. This goes double if the gift is from a married couple, because each person is entitled to the federal exclusion amount, meaning they can give up to $28,000 jointly before the money is eligible for taxation. Gifts cannot be deducted from federal income tax unless they are charitable contributions. In general, gifts to your spouse, payment of someone’s medical or tuition expenses, and payments made to political organizations will not be taxed. For more details, consult an estate planning lawyer in your area.

When are gifts taxed?

The giver must file a tax return on the gift if it exceeds the exemption amount ($14,000 in 2017). This does not necessarily mean that tax is owed, however. The giver files a return for only the amount that goes over the exclusion (so, $6,000 if they give away $20,000). This amount accumulates over the course of a person’s life until it reaches a lifetime exclusion of $5.49 million. If this amount is not reached, no tax must be paid on the gifts. As with estate tax, gift tax is not an issue for a majority of people.

Do recipients ever pay tax on gifts?

If the donor is unable to pay the gift tax, the IRS may seek payment from the person who received the gift. This occurrence is very rare, because property owners who make large financial gifts can usually afford to pay tax on them if necessary.

Giving away property is a very personal decision, and everyone’s situation is different. You may not feel secure making large financial gifts, or it may happen that the intended recipients are not yet ready for the responsibility if they are younger relatives. Ultimately, how you handle your assets is up to you.

For help deciding when and how to make financial gifts, contact Queens probate lawyer Richard Cary Spivack, and go forward with confidence.

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