Gifts are given free of charge, but when they’re assets with financial benefits, they may be subject to taxation. If you plan on bestowing a gift sometime in the near future, it’s essential to properly understand gift tax regulations to avoid any potential penalties for yourself or for the person you’re bequeathing property to. Our tax experts at SD Associates, P.C. are here to explain the regulations behind gift taxes and how it could affect you. 

An Overview of Gift Tax

Gift tax is a federal tax on the transfer of money or property to another person without receiving something of equal value in return. It’s a tax that many are unaware of until they’re confronted with its implications. Before diving into what qualifies for gift tax, it’s crucial to note that not all gifts are taxable, and there are several exclusions and deductions available.

What Qualifies for Gift Tax?

Direct Gifts: These are straightforward transfers of money or property. If you hand over a significant sum of money or a valuable asset to someone (other than your spouse, in most cases), it likely qualifies as a taxable gift.

Indirect Gifts: These are less direct but still come under the purview of gift tax. For example, if you pay for someone else’s tuition or medical expenses directly to the institution or healthcare provider, it’s generally exempt from gift tax. However, if you give them the money and they pay the bills, it might be considered a taxable gift.

Gifts Exceeding the Annual Exclusion: The IRS allows an annual gift tax exclusion – a maximum amount you can give to any individual within a year without incurring the gift tax. Any gifts beyond this threshold could be taxable. The amount changes often, so it’s essential to be up to date on current regulations. 

Gifts of Future Interest: These are gifts where the beneficiary doesn’t have immediate access or use of the gift. For example, if you put assets in a trust, and the beneficiary can’t access them until a future event or date, this is a gift of future interest and doesn’t qualify for the annual exclusion.

What Doesn’t Typically Qualify?

Some types of gifts generally won’t qualify for the gift tax. They can include:

• Gifts to Charities: Charitable contributions aren’t usually subject to gift tax.

• Gifts to Political Organizations: These are usually not subjected to gift tax.
• Gifts to Spouses: As mentioned earlier, gifts to spouses are generally exempt. 
• Payments of Tuition or Medical Expenses: As long as you pay these amounts directly to the institution or medical provider, they don’t count towards the gift tax.

The Lifetime Gift Tax Exemption

It’s also important to mention that there’s a lifetime gift tax exemption. This means that over the course of your life, you can give away a significant amount without ever paying gift tax, as long as your total gifts remain under this threshold. However, it’s essential to note that the amount applied toward the lifetime exemption reduces the tax-free amount available for estate transfer upon death.

Contact Our Accounting Firm For Gift Tax Services Today

Proper planning and understanding can ensure you make the most of the available exclusions and deductions when it comes to giving away funds or property.  If you have questions or need guidance on gift taxes or any other financial concerns, our dedicated team at SD Associates, P.C. is here to assist. Contact us today at 215-874-8450 to schedule your consultation.