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When will you owe taxes on money you gifted to a loved one?

On Behalf of | May 7, 2021 | Tax Planning

Those of significant wealth in New York may be concerned that their estate will be subject to the federal estate tax upon their death. Currently, in 2021, if your estate is $11.7 million for a single taxpayer or double that for married couples who file jointly, your estate will be subject to the federal estate tax. There are ways that you can reduce the size of your estate to avoid the estate tax, including making gifts to your loved ones during your lifetime.

Gifting money during your lifetime

If you give someone a gift of money during your lifetime, that gift will no longer be part of your estate once you pass on. However, if you do not plan properly, your gift may be subject to the federal gift tax, depending on the amount of the gift. It is important to note that if you receive a gift, generally you do not pay federal taxes on what you receive.

Avoiding the federal gift tax

As long as you stay below certain thresholds when gifting, you will not have to pay the federal gift tax. First, you cannot give more than $15,000 per person annually. Second, you are limited to gifting up to $11.7 million to all persons during your lifetime. So, theoretically, you could give your child $14,000 in 2021 and your grandchild $14,000 in 2021, etc. all while avoiding the gift tax. If you give more, say $45,000 you may still need to file a federal gift tax return, but the extra $30,000 will spill over into your lifetime exclusion, meaning you will not necessarily have to pay the federal gift tax. Money given to nonprofit organizations are considered charitable donations, not gifts.

Learn more about tax planning

Tax planning is an important part of any well-rounded estate plan. Gifting can be one way to ensure your loved ones receive an inheritance. However, care must be taken to avoid the federal gift tax. This post is for educational purposes only and does not contain legal advice. Our firm’s webpage on tax planning may be of interest to those who want to learn more about this topic.