Many people are surprised to learn that some gifts are taxable. You should be aware of gift tax laws to avoid making an unplanned gift that could leave you saddled with expensive taxes. If you or a family member is concerned about the gift tax, you should speak with an experienced Pennsylvania tax lawyer. At Herr Potts and Potts, our lawyers are available to help you with any tax matters you need to be resolved. Our lawyers are here to explain when an individual has to pay gift tax in Pennsylvania.
Lifetime Gift Exceptions
Gift taxes are primarily regulated by federal laws. This means that most states do not charge taxes for gifts that are given out of pure generosity. A gift can take many forms like property, money, or assets. If the gift is given while the grantor is alive, it is referred to as a lifetime gift. Lifetime gifts that are given to other individuals or organizations must be given freely or for an item or service that is worth substantially less than the fair market value of the gift. There are some instances where a lifetime gift could trigger Pennsylvania’s inheritance tax if the gift-giver passes away shortly after giving the gift.
Generally, any gift is taxable. However, there are exceptions to this rule that can exclude several types of gifts. The following list contains gifts that are not taxable:
- Gifts which do not exceed the annual exclusion for that calendar year (excludes gifts of future interests)
- Tuition or medical expenses paid to an institution on behalf of another individual
- Gifts made to your spouse
- Gifts to a political organization to use
- Gifts to charitable organizations
If you need to know more about how the gift tax affects any gift you intend to give, you should speak with an experienced Pennsylvania estate planning attorney.
Filing a Lifetime Gift Tax Return
When you are making a gift to an individual or organization that does not fall under one of the exemptions listed above, you should be aware of the annual exclusion amount. The annual exclusion law limits the value of a gift that a grantor can convey before they trigger tax liabilities. It is important to note that, for tax purposes, a gift can include the right to use property and the right to receive income from property.
The annual exclusion amount for the year 2018 is $15,000 per recipient. The annual exclusion limit is directly correlated to the cost-of-living expenses for a particular year. The year 2018 is the first time since 2013 that the annual exclusion amount had to be increased. This means that you can give a person or business a gift or multiple gifts that are tax-exempt until they exceed the $15,000 cap.
Gift splitting is another option that can be utilized to avoid tax liability for giving a gift. Gift splitting allows a married couple to split the costs of a gift made to an individual or organization. For example, a gift that is worth $20,000 can be split into $10,000 per spouse. This allows them to make a gift that will fall below the annual exclusion amount.
There are several circumstances that will determine when you have to pay taxes on a gift you have given. For example, if you and your spouse agreed to split the cost of a gift, both of you will have to file a gift tax return. It does not matter if the split gift does not exceed the annual exclusion amount. Other circumstances that will require you to file a gift tax return include:
- Giving a gift that exceeds the annual exclusion amount for the calendar year
- Gifting an individual or organization with a future interest that they cannot possess or use until a later date
- Gifting your spouse an interest in property that will be terminated by a future event
If any of the above circumstances apply to a gift you made, you must file a United States Gift Tax Return (Form 709). It is also important to note that conveying gifts may affect your eligibility for Medicaid benefits. Even if the gift did not exceed the annual exclusion amount if it was made within a 5-year period of filing for Medicaid benefits your application could be denied.
Delaware County Elder Law Attorneys Can Help You File a Gift Tax Return
If you or a family member need to file a gift tax return, you should speak with an experienced Delaware County elder law attorney today. At Herr Potts and Potts, our attorneys will work tirelessly to minimize the impact of taxes on gifts that you want to give to your family or friends. To schedule a confidential consultation, call us at (610) 254-0114 or reach us online.