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An update on gift tax exemption for 2018

The Internal Revenue Service (IRS) defines gift tax as the tax that is imposed on the ownership of a gifted asset. Here, the term “gift” is defined by the IRS is any transfer made to a recipient with no expectation of reimbursement.

The taxable gift can be in the form of cash, real-estate, stocks, or any other tangible or intangible property. The recipient cannot pay the patron or giver full value of something that is considered as a gift. However, the recipient can pay an amount that is less than the value of the gift. The recipient can also offer to pay the gift tax on the patron’s behalf or a percentage of it in case the patron has exceeded their annual gift tax exemption limit.

Gift tax reforms for the year 2018
The IRS had earlier announced that they would be increasing the annual gift tax exclusion due to inflation. The annual gift tax exemption is the amount of money or its equal value as a tangible asset that can be transferred in the form of a gift to a recipient without incurring any gift tax that might affect the unified credit. The exemption will be $15,000 per recipient for the year 2018, which has been $14,000 since past five years.

Annual exemption on gift tax for 2018 has gone up by $1000, which has been a rate of increment since the last four reforms. Such changes have been made by the IRS on the basis of inflation adjustments.

How gift tax exemption for the year 2018 works
For example, in 2017 if you gifted cash or an asset to 10 of your family members, wherein each recipient could be given $14,000 without you being required to pay gift tax. A grand total of 140,000 could be exempted; however, in 2018, each recipient can be given $15,000, and the grand total of 150,000 can be exempted. Annual gift tax exclusion is applicable for every taxpayer. The federal government also offers “split gift” for married couples. The annual gift tax exclusion rule for the year 2018 lets married couples spend $30,000 under the split gift rule, which was $28,000 in the previous year.

In addition, an individual can tap into their lifetime estate and gift tax exemption if they gift an asset that is valued above the amount set under gift tax exemption for the year 2018. The inflation-indexed amount for lifetime estate and gift tax exemption for the year 2018 is $5.6 million. However, the catch here is that tapping into the lifetime gift tax exemption decreases the estate tax exemption amount that would be available when the individual dies.

To explain this further, if a person gifts one of their family members money or gifts worth $1,150,000, then $150,000 will be utilized from the annual gift tax exclusion. The remaining $1 million will be used from the estate gift tax. This will erode the estate tax exemption to $4.6 million.

The following gifts are excluded from the gift tax rules of 2018:

Money or gifts to a qualified charitable organization
Charity or gifts made directly to an educational institution for a student’s loan
Gifts from one spouse to the other
Gifts or money donated to a healthcare provider for medical purposes

Apart from the list provided above, promotional gifts are not considered as “gifts.” For example, if an individual from a studio audience wins a car at a game show, it won’t be counted as a gift on the organizer’s part as per IRS standards. This is because, in this case, the giver or organizer is getting self-promotion in return. However, the tax burden of the promotional gift would fall on the recipient since his or her wealth is increases.

Filing requirements for gift tax exemption
You are required to file for gift tax return if you exceed the annual gift tax exclusion amount individually or as a joint gift with your spouse. Spouses need to file separate tax returns for the year, in which they both make gifts.

The deadline for filing the returns is same as it is for personal income tax returns, which is April 15. If the deadline falls on a weekend or holiday, it is moved to the next business day. If the donor died during 2017, the executor must file the donor’s Form 709 by April 17 or the extended due date that is granted.

It is necessary to plan ahead financially if you are thinking to for long-term investments. You can engage in systematic gifting over several years to maximize tax benefits. For instance, you can get maximum tax benefits if you have arranged to give five of your family members gifts totaling worth $70000 in the previous year and $75000 for the year 2018.

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