Gifting money or property to your loved ones can be a great way of showing your appreciation and support. But it is important to understand the laws and regulations surrounding gift taxes before you do so, in order to make sure that you are compliant with federal gift tax rules too. In this article, we will provide an overview of federal gift taxes, including how they work, current exemption amounts, and tips for successful tax planning and compliance.
What is Gift Tax?
Gift tax is a federal tax on the transfer of money or property from one person to another without receiving anything in return. The federal tax applies even if the recipient does not have to pay income taxes on the amount received, as long as it exceeds the current annual exclusion amount. In addition to the annual exemption, there are certain types of gifts that are exempt from gift tax, such as those made to a spouse or charity. If you exceed the annual basic exemption amount, you will need to file a gift tax return and apply for your lifetime exemption.
Tax Tips: It's important to note that gift tax is separate from federal estate tax. The estate tax is a tax on the transfer of assets upon your death, while the gift tax is a tax on the transfer of assets during your lifetime. Visit our page for additional information on estate and gift taxes.
What are the gift tax exclusion and exemptions for 2023?
The gift tax exclusion for 2023 is $17,000. That means you could give up to $17,000 (or a married couple could give a total of $34,000) in annual exclusion gifts to any person.
The lifetime gift and estate exemption for 2023 is $12.92 million (or $25.84 million per married couple). The gift and estate tax exemption is the amount you can transfer during your life or at your death without incurring gift or estate tax.
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What is gift tax planning?
Gift tax planning refers to the process of arranging and structuring gifts to minimize gift tax liabilities. When you give a gift of money or property to someone, the IRS considers it a taxable event. However, there are certain exemptions and strategies you can use to avoid or reduce gift tax. Gift tax planning involves understanding the laws, knowing the various tax-exempt gift options available, and structuring gifts in a way that minimizes your gift tax liabilities. Proper gift tax planning can help you minimize your tax liability and ensure that you comply with IRS regulations.
Who has to file gift tax returns?
According to the IRS, if you are a citizen or resident of the United States, you must file a gift tax return when:
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You give gifts to any one person that exceeds the annual exclusion amount in a given year.
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You and your spouse give gifts jointly to any one person that exceeds the annual exclusion amount in a given year.
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You give a gift of a future interest, such as a trust, life estate, or remainder interest in property.
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You make a gift to a non-U.S. citizen spouse that exceeds the annual exclusion amount.
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You make a gift of more than the exclusion amount to a 529 college savings plan in a single year and elect to treat it as if you made the gift over five years.
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You make a gift of any amount to a political organization or charity that is exempt from gift tax.
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You must file a gift return to split gifts with your spouse (regardless of their amount).
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If a gift is of community property, it is considered made one-half by each spouse.
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Likewise, each spouse must file a gift return if they have made a gift of property held by them as joint tenants or tenants by the entirety.
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Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes
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The donor is responsible for paying the tax. However, if the donor does not pay the tax, the person receiving the gift may have to pay the tax.
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If a donor dies before filing a return, the donor's executor must file the return.
Tax Tips: It's important to note that even if a return is not required or if a tax return is required but no tax is due, you should keep accurate records of all gifts made, as the lifetime exemption limit may still apply. If you exceed the lifetime exemption amount, you will owe gift tax on the excess.
Who does not need to file a gift tax return?
If you meet all of the following requirements, you are not required to file a gift tax return:
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You made no gifts during the year to your spouse.
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You did not give more than the annual exclusion amount to any one person.
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All the gifts you made were of present interest.
Who pays the gift tax?
The donor is responsible for paying the gift tax. Yes, the person giving the gift is the person responsible for paying the taxes. The gift tax is paid by the person who makes the gift, not the recipient. However, in some cases, the recipient of a taxable gift may owe income tax on the gift, such as when the gift is in the form of income-producing property or when the gift is a payment for services rendered.
Gift Tax Planning Strategies
There are several methods of gift and estate tax planning that can help you minimize your tax liability and ensure that your assets are passed on to your beneficiaries in the most tax-efficient way possible. Here are the most common gift tax planning strategies:
Annual Exclusion Gifts
The annual gift tax exclusion is a tax law provision that allows you to give away up to a certain amount of money or property to another person each year without incurring any gift tax liability. You can give up to a certain amount specified by the IRS per recipient per year without incurring any gift tax liability. By taking advantage of this annual exclusion, you can give tax-free gifts to your loved ones and reduce the size of your estate. It's important to note that the annual exclusion applies to each recipient, not to the total amount full value of gifts you give in a year.
Tax Tips: By making use of the annual exclusion, you can give tax-free gifts to your family and friends, while potentially reducing the size of your estate and minimizing your tax liability.
Lifetime Exemption Gifts
The lifetime gift tax exemption is a tax law provision that allows you to give away a certain amount of money or property during your lifetime or at death without incurring any gift tax liability. This means that you can give away up to the amount of the lifetime exemption in assets during your lifetime without incurring any gift tax liability. Any gifts made in excess of the lifetime exemption amount will be subject to gift tax at the current gift tax rate, which is up to 40%.
It's important to note that the lifetime gift tax exemption is unified with the estate tax exemption. This means that any gifts made during your lifetime that exceed the annual exemption amount will reduce your estate tax exemption.
Tax Tips: By making use of your lifetime gift tax exemption, you can give away a significant amount of assets without incurring any gift tax liability.
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Unlimited Marital Deduction
The unlimited marital deduction is a provision tax code that allows an individual to transfer an unrestricted amount of assets to their spouse during life or at death without paying gift tax. Under this rule, any gift made from one spouse to another is considered to be tax-free, regardless of the amount of the gift made. This means that a spouse can transfer any amount of property or assets to their spouse during their lifetime without incurring gift tax or using their lifetime gift tax exemption. Under the unlimited marital deduction, any assets that are left to a surviving spouse are exempt from the estate tax, regardless of the amount.
Tax Tips: This unlimited marital deduction only applies to gifts made between spouses who are both US citizens. If one spouse is not a US citizen, there are certain limitations and restrictions that apply.
Qualified Domestic Trusts
The unlimited marital deduction applies only to spouses that are United States citizens. A Qualified Domestic Trust (QDOT) is an estate planning tool that allows a non-U.S. citizen surviving spouse to receive property and assets from a U.S. citizen spouse without incurring gift nor estate tax. QDOT allows the non-U.S. citizen surviving spouse to defer payment of estate tax until the property or assets are actually distributed from the trust. This can be beneficial for couples where one spouse is a non-U.S. citizen, as it can help ensure that the noncitizen spouse has access to the assets and property that they need.
Trusts
Trusts can be an effective tool for gift and estate tax planning because they allow you to transfer assets to your beneficiaries while potentially minimizing your tax liability. Here are some ways trusts can be used for gift and estate tax planning:
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Irrevocable life insurance trusts
By transferring ownership of assets to an irrevocable trust, the appreciation of the assets as well as the earning of the assets will transfer to the donor without paying additional gift tax and the assets transferred will not be included in the donor's estate, potentially reducing your estate tax liability.
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Charitable trusts
Charitable trusts allow you to make a charitable donation while also potentially reducing your tax liability. There are two main types of charitable trusts: charitable remainder trusts and charitable lead trusts.
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Charitable remainder trusts
With this type of trust, you can receive income from the trust during your lifetime, and then the remaining assets are transferred to a charity after you pass away. You may be eligible for a tax deduction for the value of the charitable contribution.
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Charitable lead trusts
This type of trust allows you to donate assets to a charity for a set period of time, and then the assets are returned to you or your designated beneficiaries. By doing so, you may be able to reduce your gift and estate tax liability.
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Generation-skipping trusts
This type of trust allows you to transfer assets to your grandchildren or other beneficiaries who are more than one generation below you. By doing so, you may be able to avoid paying estate taxes twice (once when you pass away and again when your children pass away).
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Grantor-retained annuity trusts
This type of trust allows you to transfer assets to your beneficiaries while potentially minimizing your gift and estate tax liability. With a grantor-retained annuity trust, you transfer assets to the trust and receive a fixed annuity payment for a set period of time. After that time, the remaining assets are transferred to your beneficiaries. By doing so, you may be able to transfer assets to your beneficiaries at a lower gift tax value than if you had transferred the assets directly.
Tax Tips: Trusts can be an effective tool for gift and estate tax planning because they allow you to transfer assets to your beneficiaries while potentially minimizing your tax liability. The assets can grow inside the trust without potential tax implications.
Family Limited Partnerships (FLPs)
FLPs are a type of partnership that allows you to transfer assets to your beneficiaries while retaining control over them. By transferring assets to an FLP, you can reduce the size of your estate and potentially reduce your tax liability. Here are some ways to use FLPs for tax planning:
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Gift and estate tax savings: With an FLP, you can transfer ownership of assets to your children or other beneficiaries while retaining control over those assets. By doing so, you may be able to reduce the value of your estate for gift and estate tax purposes. Additionally, by gifting limited partnership interests, you may be able to take advantage of valuation discounts, which can further reduce the value of your estate for tax purposes.
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Asset protection: FLPs can provide asset protection for family assets. By transferring ownership of assets to the FLP, those assets may be protected from the personal creditors of individual family members.
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Income tax benefits: FLPs can provide income tax benefits by allowing income to be allocated to lower-income family members, potentially reducing the overall tax liability for the family.
Life Insurance
Life insurance can be an effective tool for gift and estate tax planning, as it can provide a tax-free source of liquidity to pay estate taxes or to provide an inheritance to your beneficiaries. Here are some ways to use life insurance for gift tax and estate tax planning:
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Irrevocable life insurance trusts (ILITs)
An ILIT is a trust that holds a life insurance policy outside of your estate, removing the death benefit from your taxable estate. By doing so, the death benefit can be used to pay estate taxes, provide an inheritance to your beneficiaries, or both. To set up an ILIT, you transfer ownership of the life insurance policy to the trust, and the trust becomes the policy's beneficiary. To avoid gift taxes, you may use your annual gift tax exclusion or your lifetime gift tax exemption to fund the trust.
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Premium Financing
If you don't have the cash flow to fund a life insurance policy, premium financing may be an option. This involves borrowing money to pay for the premiums on the policy, with the expectation that the death benefit will pay off the loan. This strategy can be complex and should only be used under the guidance of a financial professional.
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Estate equalization
Life insurance can be used to provide an equal inheritance to your beneficiaries, regardless of the value of your other assets. For example, if you have a family business that you want to leave to one child, you can purchase a life insurance policy and name your other children as beneficiaries, providing them with an equal inheritance.
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Charitable giving
Life insurance can be used to make a charitable donation. By naming a charity as the beneficiary of a life insurance policy, you can make a significant charitable contribution while potentially reducing your estate tax liability.
What gifts are exempted from tax?
There are several gifts and transfers that are exempt from gift tax and do not require the filing of a gift tax return. These include:
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Annual exclusion gifts: Each year, you can gift up to a certain amount to an unlimited number of recipients without incurring gift tax or needing to file a gift tax return. For the tax year 2021, the annual exclusion amount is $15,000 per recipient. This means that you can gift up to $15,000 to any individual without it counting towards your lifetime gift tax exemption.
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Medical and educational expenses: You can pay for someone else's medical or educational expenses without incurring gift tax or needing to file a gift tax return, as long as you pay the expenses directly to the institution providing the medical care or education.
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Charitable gifts: You can make unlimited gifts to qualified charitable organizations without incurring gift tax or needing to file a gift tax return. These gifts may also be tax-deductible on your income tax return, subject to certain limitations.
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Spousal gifts: Gifts to your spouse who is a U.S. citizen are generally exempt from gift tax and do not require the filing of a gift tax return. However, if your spouse is not a U.S. citizen, there are certain limitations to the amount that can be gifted without incurring gift tax.
Tax Tips: It's important to note that for educational gifts and medical gifts, the payment must be made directly to the educational institution or medical provider in order to qualify for the gift exemption.
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International Tax
Do nonresidents, and non-U.S. citizens pay gift tax in the U.S.?
Yes, nonresidents or non-U.S. citizens pay gift tax in the U.S. Unlike U.S. citizens and residents, who are subject to estate and gift tax on their worldwide assets, nonresident aliens are subject to estate and gift tax only on assets that are considered U.S. situs property.
Tangible Property - taxable
Gifts of tangible personal property and real property by nonresident aliens are subject to gift tax only if the property is located in the United States. For a nonresident, not a citizen of the United States, the gift tax applies to the transfer by gift of certain U.S.-situated property.
Intangible Property - not taxable
Gifts of U.S. intangible property by nonresident aliens are NOT subject to gift tax. Gifts of intangible assets are not subject to U.S. gift tax because intangible assets are considered to be located in the home country of the donor. Gifts of U.S. corporation shares are also not subject to U.S. gift tax since shares are intangible property. Intangible property such as copyrights, patents, contract rights, stock and debt obligations are not considered U.S. situs for gift tax purposes.
Are nonresident aliens entitled to the annual gift exclusion?
Yes, nonresident aliens are entitled to the annual exclusion for gifts of up to the amount specified by the IRS per person, unlike U.S. citizens, nonresident aliens cannot “split gifts” with their spouse and are ineligible for the unified lifetime exemption for gift tax purposes.
Are nonresident aliens entitled to the lifetime tax exemption for gift tax purposes?
No, nonresident aliens are not entitled to the lifetime tax exemption for gift tax purposes. However, nonresident aliens are entitled to the lifetime estate tax exemption for estate tax purposes. The lifetime tax exemption for income tax purposes for nonresident aliens is limited to only $60,000.
Are foreign gifts taxable?
Foreign gifts are not subject to tax in the United States. The U.S. government does not have jurisdiction to tax foreign gifts so you can receive a large foreign gift without paying taxes. It is important to note that the gift giver donor is not subject to tax in the U.S. either. Yes, you are understanding this right. You can receive millions of dollars from a foreign person without paying taxes. However, if the value of the gift exceeds certain thresholds, the recipient of the gift must report it to the IRS.
How much money can I receive as a foreign gift?
U.S. persons can receive unlimited amounts of gifts from non-resident aliens without paying taxes. However, you have to report the gift if during the current year, you received either:
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More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or
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More than the section 6039F threshold amount from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.
Reporting requirements for foreign gifts
You are required to report the receipt of foreign gifts or bequests only if the applicable threshold is exceeded. For gifts or bequests from a nonresident alien or foreign estate, you are required to report the receipt of such gifts or bequests only if the aggregate amount received from that nonresident alien or foreign estate exceeds $100,000 during the taxable year. For purported gifts from foreign corporations or foreign partnerships, you are required to report the receipt of such purported gifts only if the aggregate amount received from all entities exceeds $16,815 for 2023 (adjusted annually for inflation).
Gift Tax Compliance
It's important to comply with federal gift tax due laws and regulations to avoid penalties and interest charges. If you exceed the annual exclusion amount, you will need to file a gift tax return, even if you don't owe any gift tax. The gift tax return is due on April 15th of the year following the year in which the gift was made. If you fail to file a gift tax return, you may be subject to penalties and interest charges.
Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return
Use Form 709 to report transfers of assets subject to the federal gift and certain generation-skipping transfer (GST) taxes and to figure the tax due, if any, on those transfers. This form reports taxable gifts you make to others during your lifetime, including gifts of cash or physical assets, such as real estate. The form is also used to make allocation of the lifetime GST exemption to property transferred during the transferor's lifetime. All gift and GST taxes must be figured and filed on a calendar year basis. List all reportable gifts made during the calendar year on one Form 709.
Form 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
File Form 3520 to report large gifts from foreign persons as well as transactions with foreign trusts and ownership of foreign trusts. File Form 3520 separately from your income tax return by following the directions in the Instructions to Form 3520. In general, the due date for a U.S. person to file a Form 3520 is the 15th day of the 4th month following the end of the U.S. person's tax year.
What are the penalties for not filing a gift tax return?
If you are required to file a gift tax return and fail to do so, there can be significant penalties and consequences. The penalties for not filing a gift tax return can include:
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Late filing penalty: If you fail to file a gift tax return by the due date, you may be subject to a late filing penalty. The penalty is generally 5% of the amount of gift tax due for each month or part of a month that the return is late, up to a maximum of 25% of the tax due.
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Late payment penalty: If you owe gift tax and fail to pay it by the due date, you may also be subject to a late payment penalty. The penalty is generally 0.5% of the unpaid tax for each month or part of a month that the tax is not paid, up to a maximum of 25% of the unpaid tax.
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Interest charges: In addition to penalties, you may also be charged interest on any unpaid gift tax or penalties that accrue from the due date of the return until the tax is paid in full.
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Audit and enforcement action: Failing to file a gift tax return may also increase your risk of an audit or enforcement action by the IRS, which can result in additional penalties and fees.
Tax Tips: It's important to note that even if you are not required to file a gift tax return, it may still be beneficial to do so to establish a record of your gifts and ensure compliance with IRS regulations.
Penalties for Failure to File Form 3520
Failure to report incurs a penalty equal to the greater of $10,000 or the following 35% of the gross value of any property transferred to a foreign trust or 35% of the gross value of the distributions received from a foreign trust or 5% of the gross value of the gift up to 25%.
Conclusion
In summary, gift tax planning and compliance are important considerations if you're planning to make a significant gift to someone. By using the strategies discussed in this article, you can minimize your gift tax liability and ensure that you comply with gift tax laws and regulations. If you're unsure about your gift tax obligations, it's always a good idea to consult with a qualified tax professional. With proper planning and compliance, you can give meaningful gifts to your loved ones without incurring unnecessary tax liabilities.
How H&CO can help you
At H&CO, we have a team of experienced tax professionals who can help you plan for and comply with complex gift tax laws and regulations. Our international tax advisors can advise on the best way to give gifts in order to minimize your tax liability while still ensuring that your loved ones receive the gifts they deserve. We also offer comprehensive services such as preparing and filing gift tax returns, structuring trust structures as part of your gift tax planning, and providing guidance on other federal and state gift tax issues. Our experienced team of international tax advisors can help with all your gift tax planning and compliance needs.
H&CO's bilingual trusted CPA Tax Advisors have been helping high net-worth individuals, family offices with significant income, business owners, investors, global families, and foreign individuals with their gift tax needs, for over 30 years. You can talk to our CPAs in one of our offices near you in Miami, Coral Gables, Aventura, or Fort Lauderdale. Our international CPAs are ready to assist you with all your income tax planning and income tax preparation needs. We are ready for a successful engagement on this side of the world!
If you are interested in some of our other global tax services, take a look at our business tax services or international tax services.
