What is the IRS gift limit?
The IRS gift limit refers to the maximum cash or assets, in monetary value, that an individual is allowed by the internal revenue service to give out as a gift before a gift tax will be imposed.
For every taxpayer in the US, there is a certain price limit that serves as the IRS gift limit annually. This means there is a limit on the gift you can give out to a specific individual within a year. Gifting out money or any item of value higher than the IRS gift limit annually will warrant the need to file for a gift tax on your federal tax returns.
There also exists an IRS lifetime gift limit, which is a certain price limit of gifts that an individual can gift out in a lifetime. Exceeding this price limit will warrant the need for the taxpayer to pay a gift tax on any other gifts given out.
This is because, some gifts given by individuals are taxable, especially gifts of assets that make up tax liabilities of a taxpayer. If such a gift is given out and that value exceeds the annual IRS gift limit, then the taxpayer will be required to file for a gift tax on their tax returns for that tax year. Even if the lifetime gift limit exclusion covers the gift tax required, the taxpayer is still expected to file returns for the gift tax.
Lifetime IRS gift limit
For every taxpayer, there is a lifetime IRS gift limit of $11.58 million as of this year 2020. This means in a lifetime, the collective value of properties, money, or other items of value, given by a taxpayer below $11.58 million will not attract a gift tax. However, if the value of gifts, in cash or assets, given by a taxpayer exceeds $11.58 million, the taxpayer will be required by law to start paying a gift tax on any amount above the $11.58 million limits. Unless you have given away money or assets above $11.58 million, you don’t owe the IRS a gift tax.
In 2019, the IRS gift limit for a lifetime was $11.4 million but was raised to $11.58 million in 2020. A lot of taxpayers are not really worried about going a gift tax because most would not expect to exceed the $11.58 million IRS gift limit in a lifetime, however, many individuals can be more generous than others and need to understand the tax rules guiding giving out lavish gifts.
The annual IRS gift limit
Apart from the lifetime IRS gift limit taxpayers need to understand the annual IRS gift tax exclusion. This refers to the IRS gift limit amount that an individual is allowed to give away to as many individuals as desired in a year, without the gift reflecting against the $11.58 million lifetime IRS gift limit. For an individual taxpayer, the annual IRS gift limit that is covered by the annual gift-tax exclusion is $15000.
If the taxpayer gifts an individual any cash or assets above the $15000 annual IRS gift limit that is covered by the annual gift-tax exclusion, the taxpayer will be required to file a gift tax on his/her tax returns. However, if the taxpayer has not exhausted the 11.58 million dollar lifetime IRS gift limit, the taxpayer will not be required to pay the gift tax because any excess amount from the gift-giving will be deducted from the lifetime IRS gift tax exclusion of 11.58 million dollars.
For example, if a taxpayer gifts out $5000 to his friend and 25000 dollars to his girlfriend and he still has his IRS lifetime gift limit intact, that taxpayer will not be required to file a gift tax for the 5000 dollars given to his friend because it is below the annual IRS gift limit of $15000 and therefore covered by the annual gift-tax exclusion.
However the $25000 given to his girlfriend is above the $15000 covered by the annual gift-tax exclusion, therefore ($25000 – $15000 =$10000), the excess 10000 dollars will be subtracted from the lifetime IRS gift limits, to reduce the lifetime value of gifts that the taxpayer can give out by $10,000.
When filing your tax returns, the gift given out to the friend will be ignored because it is below the IRS gift limit annually, however, the taxpayer will be required to file a gift tax of the 25000 dollars given to his girlfriend on his tax returns, but would not actually have to pay any amount because the deduction will be made on the tax payer’s IRS lifetime gift limits.
The essence of filing a gift tax returns for any particular gift above the $15000 ( cash or assets ) is to help the IRS keep track of your collective giving in order to determine when you will be required to start paying a gift tax. Filing the gift tax returns helps you to keep the IRS informed of your dealings.
A gift tax can be referred to as the tax that is required by the government, to be paid by the donor of the cash or property that is being given as a gift to another individual. The transfer of ownership on a property from one individual to another can be regarded as a gift or donation if the initial owner is receiving nothing in return or receiving something less than the estimated value of that property. A gift can be money, properties, items of value, and other assets
A way around the IRS gift limit for extremely generous taxpayers
It is understandable that different individuals can be more generous than others. A lot of people derive pleasure in giving out things to other people and might get restricted due to the limitation placed by the IRS as an annual IRS gift limit and lifetime IRS gift limit.
Therefore, they would be interested in finding a way that will enable them not to worry so much about reducing giving to prevent incurring a gift tax.
Obviously, every taxpayer is required to pay tax as stated by the tax code, however, every individual is entitled to the annual gift tax exclusion and the lifetime IRS gift limit; therefore if a taxpayer is married, the taxpayer and their spouse will both be entitled two separate lifetime IRS gift limit of 11.58 million dollars and an annual IRS gift limit of 15000 dollars each. Therefore, generous taxpayers can claim joint gifting and then split the price amount to scale below the IRS gift limits.
For example, is a taxpayer that desires to give his friend $25000, he can claim a gift of $14000 to the friend and have his spouse claim a gift of $11000 to the same friend. Jointly they have given that friend a gift of 25000 dollars but none of them would be required to file a gift tax in their tax returns because both giftings were below the $15000 annual gift-tax exclusion. Smart right?
According to the tax code, not all cash or assets given as a gift will attract a gift tax. There are actually some giftings that are tax-exempt and a taxpayer making those gifts will not have to worry about an annual or lifetime gift tax limit. Some of these include:
- Gifts below the annual IRS gift tax exclusion
- Gifts to a spouse
- Gifts paid directly to a medical provider for the medical expenses of another
- Gifts paid to an academic institution for the tuition of another individual
- Gifts to IRS approved charities.
On such gifts, no IRS gift limit applies, and giving to the entities listed above are tax exempt.
Many taxpayers do not properly understand the tax rule governing gifting and may someday encounter a tax penalty due to their ignorance. Most times, taxpayers are asked to pay gift taxes on giving that they didn’t intend as gifts. However, the IRS does not work with your intentions but with actual facts regarding the determination of what a gift is. Donating a huge amount towards a family member’s wedding or giving a friend an interest-free loan can be regarded as a gift, on which the rules of the IRS gift limits will apply.
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