Giving gifts is a common tradition most people do during the holiday season. A lot of people don’t know this, but there is always a tax exemption for the amount you are willing to give. However, did you know that there is only a specific amount that is exempted? If you don’t know how much money a person can receive as a gift without being taxed, then you are not alone! Let’s get into details further down below.
What is a Gift Tax
As the name implies, a gift tax is a tax being levied on gifts in which the sender gets nothing in return. In general, whenever you send money as gifts to certain individuals without exceeding $15,000, the IRS isn’t involved in these transactions.
As what IRS says, “Any transfer whether it’d be directly or indirectly, wherein considerations not given of equal value in return.” Still, the IRS has gift limits, both the amount you can give over the span of your life and for every year. If you go well and beyond those limits, there’s a certain amount you should pay, and that is the Gift tax.
Also, in almost all cases, the sender is the one to pay the gift taxes, not the recipient. A recipient can only pay gift taxes if he/she elects to pay through an agreement. Furthermore, recipients don’t shoulder any immediate tax in return, but they can still be taxed upon when they sell those gifted properties down the line; that is where the capital gains tax kicks in.
How Much Money Can A Person Receive As A Gift Without Being Taxed
By 2021, your gift recipient can receive as much as $15,000 without being taxed. This means that each of your recipients can get $15,000 each. The IRS imposed a tax exemption when you send money to a certain person without anything of equal value in return.
The IRS has announced that the annual gift tax limit will be $15,000 for 2021. This is going to be a big change from the current $11,400 limit.
The tax code for gifts has been in place since the year 1976 and every time the tax legislation changes, Congress adjusts it to fit today’s economic realities. The current tax code sets a $14,000 limit on gifts each year per person before being hit with a 40% gift tax rate. However, this is set to change as of December 31st of 2020 to be $15,000 per person per year.
Furthermore, this can also be applied to parents sending money to their children or in other cases in which a parent is gifting a car, property, or any type of transfer.
Should You Pay Taxes If You Receive a Gift?
In most cases, no. At the federal level, inheritance and gifts received by you aren’t taxable. However, if those assets generate money, such as collecting rent, earning interest, or dividends, that is likely to be taxable. Some states have inheritance taxes being levied.
Giving Gifts to Multiple Parties
As mentioned earlier, if you are sending to multiple recipients, the gift tax exemption works individually. For example, if you are a parent who is sending $15,000 to your five children in 2021, your gifts totaling $75,000 ($15,000 x 5) are exempted from gift taxes.
In addition, you can also split the money between you and your husband or wife. This means that you and your spouse can each send gifts not exceeding $15,000 and still be exempted.
How Can I Pay Gift Taxes?
If you send money that exceeds the allowable amount, then the first thing to do is report your gift. In almost all cases, you are required to fill up the IRS Form 709 on or before the deadline of tax filing. Just download the document and answer every relevant line in the form, and sign it up with a date at the bottom. After doing so, you can send the form along with your other tax returns.
Anytime your gift exceeds the allowable amount, you should complete IRS Form 709. Another thing is, if you are sending large sums of money, it would be wise to hire a financial advisor as these are their specialties, and they are more than capable of dealing with these taxes. Because, not everyone has well-equipped knowledge about how tax works, so it would be better to have an advisor.
What if the GIft isn’t Cash
There are many occasions when a gift isn’t cash. For example, Aunt Lisa might give your child a diamond necklace. This gift is worth $2,000 and is not taxable to Lisa or the recipient. However, it’s still subject to the cost basis rules.
If you’re thinking that if she didn’t have any cost basis that carried over from the purchase of the necklace then it would be tax-free for both her and you, think again. If your aunt bought the necklace for $2,000 (her cost) and gave it to you, then you would get a $2000 deduction on your tax return for an itemized deduction in addition to having no taxes owed on the gift.
Receiving gift is a wonderful thing for both of you ( giver and receiver), we hope this article help you understand the tax thing, and you can enjoy the gift without worry