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Gifting your family comes with tax benefits. There are annual and lifetime exemption limits that can be availed so that the gifts given are not liable to tax. Read this guide by H&R Block India to know more about the applicability of U.S. gift tax laws.

Applying U.S. Gift Tax Laws on Gifts

Last Update Date : June 25, 2018

US gift tax

Oprah Winfrey, a household name recognized all around the world for her generosity, as her road to success soared, she looked back to those around her and gave to all those she could, a helping hand. The more she gave, the more she earned a place in people’s hearts, making the statement, “The more you give the more you receive”, True. Not only did she become more successful, thereby earning more, she also received an undefinable amount of love from around the world. Even the government recognizes the truth of the statement and gives by offering tax exemptions on gifts given. Let’s examine the gift tax and how it can be applicable to you.

What is Gift Tax?

The Federal Gift Tax applies to all gifts given by U.S. citizens and residents during his/her lifetime. The giver of the gift is liable to pay tax on gifts given exceeding the lifetime exclusion limit of $5.49 million. Additionally, the annual exemption limit is $15,000. So, any gifts given during the year under this amount, do not need to be reported and this amount will not be deducted from lifetime exclusion limit.

Gift Tax and Estate Tax

A person’s estate is the total net value of all his/her assets. As per the gift tax rules the first $11.2 million is tax free. After this exemption limit, the remaining amount is taxable at the highest rate of 40%. So, if even if a taxpayer tries to gift his assets slowly to his family, the amount would get deducted from his lifetime exclusion limit.

Example of Gift Tax Applied

So, for example, if a taxpayer gifts annually to his children and grandchildren $15,000 repeatedly over a period of time equaling a total of $1,000,000 then he would still have $11.2 million left as his exemption limit on his estate.

Also, if a mother gifts her daughter her house, which was bought at $100,000, but is now valued at $350,000, the tax basis would be $100,000. However, if she were to sell this house the gains would equate to $250,000, which would be liable for capital gains tax.

But if the same house was inherited by the daughter, the tax basis would be $350,000 and if the house is sold for $375,000, then she would only have to capital gains tax on $25,000.

Gifts Exempt from Gift Tax

The following do not attract gift tax:

  1. Under the Exemption Limit – A person can give as many people he/she wants up to $15,000 without triggering the gift tax.
  2. Education Expenses – There is no limit for making payments towards a person’s education, however, the payment must be made directly to the institution and it is only applicable on the tuition fees. To pay for living expenses, books etc., a person can avail of the yearly limit of $15,000.
  3. Spousal Gifts – An individual can gift his/her spouse an unlimited amount without attracting gift tax. However, if the spouse is not an U.S. citizen, then certain exclusions would be applicable. For gifts to foreign spouses, an annual limit of up to $149,000 exists.
  4. Medical Expenses – Payments made directly to the person in need of the medical treatment are not subject to gift tax. Medical expenses include:
    • Long term medical insurance
    • Diagnostics
    • Treatment of disease
    • Surgeries/procedures involving the functioning of the body
    • Transportation for medical care.

Reporting Gifts

If a taxpayer were to gift another person over the annual amount of $15,000, then the amount needs to be reported in IRS Form 709, when filing his/her annual income tax return.

gift tax form 709 screenshotWhen filing the gift tax return form, the gift giver needs to mention the fair market value of the asset as on the date of the transfer. The recipient’s name must also be mentioned along with any supporting documents, if the gift is stocks, for example.

Gift Tax for Expats and Non-Residents

For expats and green card holders, living in other countries, their assets worldwide are subject to the tax laws of the U.S. as well. So, any gifts given worldwide would be liable to the U.S. gift tax. The tax implications for this group of taxpayers can be complex, requiring expert assistance when filing annual income tax return.

How H&R Block India Can Help You?

The joy of giving should never be diminished with complications created by laws, especially tax laws imposed on either the donor of the gift or the receiver. To ensure all the necessary precautions are taken when giving gifts and filing your annual income tax return, especially your worldwide income, enlist the aid of the international tax experts at H&R Block India.

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