The Lifetime Gift Tax Exemption and what it means for you in 2020
Being generous is a good attribute, however, when it comes to giving out a substantial amount of one’s money or assets, one has to be knowledgeable about the possible tax consequences of that giving.
It may seem funny to see the word “consequences” placed right next to “giving,” but it a gift tax is actually a consequence of giving. A donor usually is the one that pays a gift tax on gifts given. Therefore, as blessed as it is to give, it is wiser to understand the tax code requirements on giving so as to avoid any tax issue for not filing appropriately and when it is due.
Generous Individuals that have a lot of taxable assets like properties and other items of value need to understand what a lifetime gift tax exemption means and how the gifts given out over the course of their lifetime can accumulate and affect their wealth even after death.
What is a lifetime gift tax exemption?
A lifetime gift tax exemption is the allowance limit given to taxpayers, within which the accumulation of gifts given can be tax-free. This exemption allows taxpayers to be able to gift out large cash amounts and assets without having to pay a gift tax on the gifts given. However, when the exemption limit is exceeded, the taxpayer will be required to file a gift tax on their tax returns for the gifts given out.
As an individual will gift out several gifts over the years, the price value accumulates over the lifetime of the individual and is counted against the lifetime gift tax exemption of that individual.
The IRS lifetime gift tax exemption limit in 2020
In the year 2019, the IRS lifetime gift tax limit was placed at $11. 4 million but was, however, increased to $11.58 million in the year 2020. This means that a taxpayer can gift out cash or assets of up to $11.58 million over a lifetime without having to file for gift taxes because the gifts will be covered by the gift tax exemption. However, any gifting that has exceeded this limit of $11.58 million will warrant the need for a gift tax filing.
However, it is required that a taxpayer understands that one might need to file a gift tax on their returns even in a situation when their lifetime gift tax exemption limit has not yet been exceeded. This is because, apart from the lifetime gift tax exemption given by the IRS, there is also an annual gift-tax exclusion limit which is placed at $15000 for every taxpayer. This allows a taxpayer to be able to gift out cash or assets worth up to $15000 to another singular entity in a tax year without the need to file a gift tax on their returns.
For example, if a grandfather gifts out cash of $35,000 to his grandson within a year, he would be required by law to file a gift tax return for the excess $20000 above his annual IRS gift tax exclusion limit ($35000 – $15000 =$20000). The $20000 will then be subtracted from his lifetime gift tax exemption limit to reduce his lifetime gift tax limit from $11.58 million to $11.56 million. The grandfather will not be required to pay any amount, however for the gift tax because he is still covered by the lifetime gift tax exemption.
For married couples, their lifetime gift tax exemption will jointly be $23.16 million because both individuals are eligible for an $11.58 million lifetime gift tax exemption and $15,000 annual gift-tax exclusion each. Therefore, they can jointly gift out $30000 a year without attracting a gift tax or going above the allowable limit.
Federal estate tax exemption
The Life Time gift tax exemption is related directly to the federal estate tax which also has an $11.58million limit for estates. When an individual gifts out properties or a substantial cash amount above the annual gift-tax exclusion of $15,000, it is counted against both the lifetime gift tax exemption and federal estate tax limit, and the excess is reduced from both over a lifetime period.
In the event of the death of the taxpayer, all money possessed and assets will be valued by the IRS, and anything owned that is in excess of the amount of federal estate tax exemption /lifetime gift tax exemption remaining will be remitted to the government as the federal estate tax.
For example, the grandfather that gifted his grandson son $35,000 and has had his federal estate tax exemption and lifetime gift tax exemption reduced to $11.56 million. If as at the time of death he still maintains the exemption of $11.56 million, and his estate, cash, and asset worth are valued at $13 million, a total of ($13 million – $11.56 million) $1.44 million will be remitted to the IRS as the federal estate tax.
It should however be noted that for married couples, each individual holds a federal estate tax of $11.58millon, and the exemption is transferrable to the living spouse after the death of one. Therefore, if the grandfather’s wife is still alive and has her own lifetime gift tax exemption intact at $11.58million, he late husband exemption will be added to her own exemption limit ($11.56 million + $11.58 million = $23.14 million) giving her a total of $23.14 million federal estate tax exemption limit and this will sufficiently cover her husband’s excess above the estate tax limit. Therefore, no federal estate tax needs to be remitted to the IRS since it is still being covered by the spouse’s exemption limit.
Non-taxable gifts
There are certain gifts of assets and cash that can be given by a taxpayer without attracting the need to file a gift tax or reduction from their lifetime gift tax exemption balance. These include:
- A gift given out to IRS approved charity organizations
- Gifts paid directly to a medical facility to pay off another individual’s medical expenses.
- Gifts paid directly to an educational institution to pay for another individual’s education tuition excluding payments for apartments, books, school materials, etc.
- Gifts that are given to your spouse who is also a US citizen.
Conclusion
The IRS does not discourage generosity, however, it discourages individuals trying to avoid paying their tax liabilities by intentionally limiting their assets through the gifting out of properties. For this reason, there are certain limits put in place to check the giving activities of taxpayers. These limits include the annual gift-tax exclusion, lifetime gift tax exemption, and the federal estate tax exemption limit. Taxpayers that are extremely generous with their properties and cash need to work together with their financial advisors and tax preparer to understand how to give and when they are required to file a gift tax return to avoid any penalties or fines in later years.
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