Many people in New Jersey have spent a lifetime accumulating a large nest egg. So, as they grow older, they may wish to start thinking about who they want to hand their assets down to. While some people will choose to execute a will or trust to accomplish this goal, others will choose to give gifts to loved ones while they are still alive. However, it is important to recognize when the federal gift tax will apply.
The gift tax is imposed by the federal government when a person gives another person a gift over a certain value. For tax purposes, a gift is something that the recipient receives without having paid the entire value of the gift. It is the giver that incurs the gift tax.
However, there are exceptions in which the gift tax will not apply. Gifts given to one's husband or wife are not taxed, nor are gifts given to a political organization. In addition, there is a financial limit set each year with regards to the value of gift; gifts worth less than this limit are excluded from the gift tax. For example, for 2018 that limit is set at $15,000. So, gifts worth less than $15,000 made in 2018 will not be taxed. Donations made by a donor or individual to pay for medical or educational costs also will not be subject to the gift tax.
The gift tax can play an important role in estate planning. Some people want to see and enjoy what their heirs will spend their inheritance on. Therefore, they may want to give their loved ones gifts during their lifetime, rather than leaving these assets in a will or trust. However, most people also want to avoid paying taxes. Therefore, it is important to keep the $15,000 gift tax exclusion in mind when giving gifts in 2018, if you wish to avoid paying taxes on those gifts. A person can give gifts worth less than the annual gift tax exclusion each year, so it is possible for a person to give a gift to a loved one to take advantage of this exclusion over the course of time, giving loved ones gifts every year free from taxation. Of course, it is important to understand how gifts are treated legally, both for tax purposes and otherwise, if a person wishes to make gifts part of their estate plan.
Source: Investopedia, "Gift Tax," accessed April 22, 2018