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How can I reduce my gift tax burden?

On Behalf of | Jun 30, 2020 | Gift Tax |

Estate planning is often about family legacy. In many cases, this means taking the assets you’ve worked hard to obtain and using them to better the lives of those you love. Sometimes, simply giving that person a thoughtful gift seems like the simplest method.

But will you have to worry about the gift tax?

The basics of the federal gift tax

Let’s clear up one thing right away: Colorado does not have its own specific gift tax (nor does it have an estate tax). However, you still need to be mindful of federal gift tax rules.

U.S. law allows individuals to gift a certain amount each year to an individual. This is called the exclusion amount, and in 2020 it is $15,000. So you could gift an adult child up to that exclusion amount this year and you do not have to report it to the IRS.

On top of that, there is a lifetime exemption that currently sits at $11.58 million. While you have to report annual gift overages above $15,000, you will only take on a tax burden if the cumulative overages over the years go above the lifetime exemption.

If you do pass that $11.58 million threshold, you will then have to pay the gift tax.

A few things to keep in mind

There are some additional specifics worth mentioning. For one, remember it is the giver that would have to pay the gift tax – not the recipient.

In addition, certain types of gifts are exempt, meaning they generally do not count toward the exclusion amount and are not subject to the gift tax. When handled properly, this can include:

  • Gifts to a spouse who is a U.S. citizen
  • Gifts to charity
  • Directly paying for someone’s medical bills
  • Directly paying someone’s tuition
  • Gifts to a political organization

If you’re worried about crossing the gift tax line, it’s important to begin preparing now. A sound legal strategy combined with thoughtful long-term planning can help reduce or avoid this potential cost.