How do you calculate the federal gift tax? Well, first, you should find out whether you will be paying anything in the first place. Also, you need to know which tax year’s return you are filing. For example, how you calculate gift tax in 2019 may not be how you do so in 2021 and beyond. So, you should pay close attention to the yearly gift tax values.
Generally, most gift-givers won't ever have to pay gift tax. The Internal Revenue Service allows individuals hefty lifetime gift exclusion along with an annual gift exclusion, so you'll pay gift tax only after giving away millions. If you do exceed the limits, the amount of gift tax owed is the excess of the gift over your annual exclusion multiplied by the current gift tax rate.
How Is Gift Tax Calculated?
The IRS allows individuals a lifetime exclusion of $11.7 million as of 2021 and $12.06 million for the 2022 tax year. That means that you can give away up to that much money in your lifetime and not pay a dime of gift tax.
In addition, you may gift up to $15,000 per recipient per year in 2021 without dipping into your lifetime allowance. The limit will increase to $16,000 for the 2022 tax year. After using up your lifetime allowance, any amounts above the annual exclusion are taxable.
Suppose you have used up your lifetime exclusion and you give your three children $10,000 apiece. Since each gift is less than $15,000, you owe no tax. However, say that instead you give $30,000 to just one child.
In this case, using a simple gift tax calculator, $15,000 ($30,000 minus the $15,000 exclusion) is taxable. The tax owed would be $15,000 times the gift tax rate, which ranges from 18 percent to 40 percent.
Gift Tax Exclusions
In addition to the annual exclusion per recipient, certain other gifts are excluded from the gift tax equation. Any gifts given to your spouse, political organizations, or for medical and tuition payments are excluded.
If you want to exclude medical and tuition payments, the payments must be made directly to the institution itself. For example, you could pay a university directly for your child's tuition or pay your mother's health insurance bill directly to her provider.
Implications of Non-Cash Gifts
Along with cash payments, non-cash gifts are also taxable. If you gift an asset, like a car or a house, the monetary value of the asset is its fair market value at the time of the gift.
Fair market value is the price a buyer and seller would agree upon in a normal market transaction. If you're planning on giving away an asset, obtain an appraisal of the property and use the figure provided as fair market value.
Filing a Gift Tax Return
You need to file a gift tax return only if you've exceeded your annual exclusion during the tax year. However, you won't pay anything unless you've exceeded your lifetime exclusion and actually owe gift tax. The giver, not the recipient, is responsible for filing the gift tax return and paying the gift taxes.
To file a gift tax return, complete Form 709 when completing your annual tax return. You'll need to attach copies of any relevant documentation, like copies of appraisals and documents related to the transfer of gifts.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.