Making a Financial Gift - How Does Gift Tax Work

Posted by Chris Wendland | Dec 22, 2016 | 0 Comments

Whether it is Christmas or another occasion, you can make financial gifts to anyone by keeping a few simple rules in mind.  Note that these rules apply for gifts to other people, not to charitable gifts.

  • According to IRS guidelines, in 2016 you can gift up to $14,000 (annual gift tax exclusion) to someone else per calendar year, without having to worry about gift tax.
  • If you are married, both you and your spouse can each gift the same amount and still stay under the annual gift tax exclusion, so together you could give $28,000 to someone else.
  • Your financial gifts can be made to anyone - it doesn't have to be a family member. You can make financial gifts to reduce your estate value, which in turn reduces your overall probate costs.
  • The recipient of your gift will not have to pay any taxes on it. When thinking about estate planning, if you are an Iowa resident and have a friend or relative (other than a parent or child) that will receive something from your estate, they will have to pay inheritance tax on that.  Gifting now instead of waiting for distribution through probate may be a better option, if you have the flexibility.

What happens if you do exceed the maximum gift allowance?  You have to file a gift tax return to report the amount of the gift that exceeds the annual exclusion, but, there is no tax to pay by you or the recipient.  The information you report becomes relevant during the probate of your estate.   The reported gift amount will be deducted from your estate tax exemption.  For 2016, the gift and estate tax exemption is $5.45 million per individual, so for most individuals this will not create an issue during life or at death.

About the Author

Chris Wendland

Chris grew up in South Dakota and has been in Iowa since starting law school in 1992. College in New England and a few years working in a large Silicon Valley law firm provided interesting experiences and perspectives, but there's no place like the Midwest.


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