Adulting Part Fourteen: The Gift Tax
If you give someone money or property during your life, you may be subject to federal gift tax.
We recently had to settle one of our last parents estate and found yet another area where the government has its hands in your pockets.
The gift tax.
Do you know what that is?
It’s where you have to inform the government that you’re giving a gift to another person in order to pay taxes on anything over what the government decides the maximum gift is.
Not like at Christmas time.
It’s money and property I’m talking about.
Your money. Your property.
This is during your lifetime if it’s big gifts being transferred, but they also come after you if you’re dead too.
It’s mind boggling how many places they take our money.
From the I.R.S. (Internal Revenue Service) (they’re the government people you send your tax money to):
The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether or not the donor intends the transfer to be a gift.
The gift tax applies to the transfer by gift of any type of property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift. https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax
The tax applies whether or not the donor intends the transfer to be a gift.
Many Americans avoid paying the tax throughout their lifetimes simply because of the allowed limits set by the IRS.
What is the annual gift tax limit?
In the 2023 tax year, the limit was set at $17,000 per recipient and in 2024 it is $18,000.
Essentially, you can give $18,000 in gifts to as many individuals as you choose without being responsible for the gift tax. The moment you give more than that amount to any recipient, the tax will be incurred.
This federal tax starts at 18% and can reach up to 40% on certain gift amounts. The responsibility for paying the tax typically lies with the giver, not the individual receiving the gift.
If you’re a farmer and you want to transfer your farm to children, the feds are going to take their slice there too.
Beginning in 1916, the federal estate tax has applied to the transfer of property at the time of death. However, in 2024, it only applies to estates with assets over $13.61 million. The combined exemption limit for married couples is $27.22 million. If your assets — farmland, equipment, equity, retirement funds — total more than the exemption limit, your heirs may be required to file a federal estate tax return and pay a 40% tax on the amount over the limit. Generally, the federal estate tax must be paid in cash within nine months of a death. This can be difficult if an estate consists of mainly non-cash assets. Farm Bureau Financial Services
So if you don’t want to be taxed and you’re feeling generous stay under the $18,000 limit, or spread an amount over two years. If you’re a farmer, prepare a succession plan.
How did our government get so much power over our lives and money?
I don’t remember voting for this.
More from the IRS:
Publication 559 (2023), Survivors, Executors, and Administrators
This publication is designed to help those in charge (personal representatives) of the property (estate) of an individual who has died (decedent). It shows how to complete and file federal income tax returns and explains their responsibility to pay any taxes due on behalf of the decedent….
The publication also explains how much money or property a taxpayer can give away during their lifetime or leave to their heirs at their death, before any tax will be owed. A discussion of Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, and Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is included.
Why is any tax owed when I can guaran-damn-tee-you there’s already been some taxing that’s gone on with the money/property being gifted?
If you had a generous deceased loved one, distributing the inheritance from the estate doesn’t happen until Form 709 is filed with the Federal Government, the IRS, and they get their cut first, heirs and beneficiaries get what’s leftover.
It takes a look at a maximum of ten years gift giving history. You can read more about this tax here.
It’s called double taxation and this isn’t the only place where it happens.
Alimony
Each state has its own state income tax laws. How divorce-related payments and income are treated differs from state to state.
The taxation of alimony on federal tax returns recently changed because of the Tax Cuts and Jobs Act of 2017 (TCJA). The Tax Cuts and Jobs Act (TCJA) was a major overhaul of the tax code, signed into law by President Donald Trump on Jan. 1, 2018. Many of these tax benefits to help individuals and families will expire in 2025.
As a result of TCJA, alimony or separate maintenance payments relating to any divorce or separation agreements dated January 1, 2019 or later are not tax-deductible by the person paying the alimony. The person receiving the alimony does not have to report the alimony received as taxable income.
In other words, my ex got to deduct the alimony he paid to me (which had already been taxed as income) and I paid income taxes on what I received because our last tango (divorce) occurred in 2004, long before the government decided to be more fair.
He got a tax break, I got to pay taxes on money that was already taxed. Your government transferred the income tax from the alimony payer to the payee.
Old boys network?
Probably.
But it is…
Double taxation.
Social Security
The law (TCJA) also repealed the ability to recharacterize one kind of contribution as the other, that is, to retroactively designate a Roth contribution as a traditional one, or vice-versa.
Why is this important?
In retirement when you withdraw money from a traditional IRA, it’s taxed as income. When you withdraw money from a Roth it is not taxed as income.
But Social Security payments are another thing.
They can’t just let you ride off into the sunset with your money.
Your Social Security benefits are generally considered taxable income, but the amount of benefits subject to tax varies based on your income level and filing status. The IRS uses a formula to determine the taxable portion of your Social Security benefits. How this works gets into a whole spaghetti bowl of rules, typical for the IRS. The average human couldn’t possibly understand it, especially if you’re over 60 and suffer from CRSS (Can’t Remember Sh**t Syndrome).
But there is a whole industry to help you make the right decisions.
Why is your Social Security taxed at all?
Wasn’t it collected from you as a tax when you were young and working?
Donald Trump has said he’ll get rid of this tax on your Social Security if he gets into office, I hope he does manage to get rid of this unfair tax.
Again, double taxation.
Death and taxes are the only thing guaranteed in your life. I don’t remember who said that, but it’s true.