Business Succession, Estate Planning, Legacy, Real Estate, Wealth

The IRS Will Sneak You a Tax Bill if You Do This Common Thing

If you gift too much to someone, I (and your CPA) will smack you. Professionally, of course, so it won’t hurt that much.

But we will ask why you didn’t ask us about the tax consequences of gifting beforehand.

Specifically, gifting in the United States is a taxable event if you exceed a certain threshold.

In 2022, if you gift more than $16,000 to any individual in any 12-month timeframe, it is technically a taxable event.

This means you will have to pay 18% – 40% of the amount exceeding $16,000 to the government.

You will also have to file a gift tax return and other accompanying documents.

Your CPA will love the extra work, for sure.

If you’re a sharp thinker, you may say “what if I don’t gift cash? What if I just gift a car, or a house, or some physical asset?”

And the answer would still be the same: if your asset, no matter its form, is worth greater than $16,000 in value, you are incurring that tax bill.

But there are ways to avoid paying that gift tax.

On the estate planning side, one could file with the IRS a specific document that states that you will not pay the gift tax. Instead, you will lower your exemption amount from the estate tax the amount you owe in gift taxes.

For example: you don’t have to pay an estate tax (in 2022) unless your estate is worth greater than $12.06 million. If you gift a car to a child that is worth $76,000, you will owe 18-40% of $60,000. If you file the form mentioned above, you will not owe any gift tax, AND your estate tax limit is reduced from $12.06 million to a flat $12 million.

Great, right? That means you can make larger gifts, and you don’t have to pay any gift taxes.

But not really. You still have to go through the paperwork. You’ll still need to hire a CPA to make sure it’s done correctly. It’s kind of a pain in the butt, to be quite frank.