Tell me if I'm wrong, but I think it's a common misconception if you gift someone more than $16k, you will have to pay taxes.

You can gift someone $50,000 or $100,000, or a million dollars, and you still won't pay taxes. You would need to complete an irs form for those amounts, but as long as you don't exceed your lifetime limit of 12 million, you won't owe taxes. So for 99.9% of us, we don't need to worry about gift taxes at all. Am I wrong? I suppose the exclusion could be greatly reduced, but even than, except for gazillionairs, no worries.

If you are gifting, you've paid taxes on all of it. You gift with after tax money.

A simple google search on gift tax limit shows from

martasset dot com slash retirement slash gift-tax-limits

The annual gift tax exclusion of $16,000 for 2022 is the amount of money that you can give as a gift to one person, in any given year, without having to pay any gift tax. You never have to pay taxes on gifts that are equal to or less than the annual exclusion limit. So you don’t need to worry about paying the gift tax on, say, a sweater you bought your nephew for Christmas.

The annual gift exclusion limit applies on a per-recipient basis. This gift tax limit isn’t a cap on the total sum of all your gifts for the year. You can make individual $16,000 gifts to as many people as you want. You just cannot gift any one recipient more than $16,000 within one year. If you’re married, you and your spouse can each gift up to $16,000 to any one recipient.

Coplin, here’s an important part left off from the website you quoted: “If you gift more than the exclusion to a recipient, you will need to file tax forms to disclose those gifts to the IRS. You may also have to pay taxes on it. If that’s the case, the tax rates range from 18% up to 40%. However, YOU WON’T HAVE TO PAY ANY TAXES AS LONG AS YOU HAVEN’T HIT THE LIFETIME GIFT TAX EXEMEPTION.” (My emphasis)

So, as I said above: “You would need to complete an irs form ……., but as long as you don't exceed your lifetime limit of 12 million, you won't owe taxes.”

That is true Oregon Woodsmoke, I am talking about after tax gifts.

Every few years the rules and amounts change. So if I were you I'd consult with a Tax Specialist that know about estate tax, probate and gift taxes. Because at one point (years ago) you could Gift to one person up to 1 million dollars in your lift time that would come off your estate. Like if you have many children and one of your married kids have many family issues, like a sink grandchild, that you paid for the medical costs, tutors, private schools, etc. So that one child's gifting was early portions from their share of your estate.

I believe I can clarify. Not certain but pretty sure so confirm with CPA, tax lawyer, etc.

You can gift up to the annual limit of whatever that is in a given year. Let's say it's 16K. Then no form required to be filed with IRS. Also no tax owed by you or recipient.

If you give more than the annual limit of 16K as an example, you need to file form with IRS so they know how much to reduce your lifetime exclusion by when you die and your estate is passed to heir. Still no tax owed by you or recipient unless the value of estate exceeds the lifetime exclusion minus the amounts for which you needed to file the form with the IRS. If the value of estate does exceed lifetime exclusion, then your estate tax would kick in for whatever amount was due which would be paid by your estate although really at that time by your heir since you are no longer around.

There might be clever techniques used by sharp tax lawyers to get around what is described above but you'll have to talk to one of them since that is above my level of knowledge.

If your estate will not exceed lifetime exclusion, you probably don't need to worry but keep in mind that your lifetime exclusion could be reduced by a lot, maybe even to zero, if the radical leftists (Dems) are able to gain enough power in Congress and White House.

BillW [NJ],

I hadn’t thought about that dino, that gifts amounts above $16k would be added to the value of the estate to determine taxability. And yeah, it kinda stinks the rules can change every two or four years. A good reason to keep the filibuster and super majority requirements (I don’t know what the heck I’m talking about on that last sentence :-)

Well thank you Lisa! I’ll watch your back next time :-)

It used to be $15,000 but now its $16,000. I just gave my two cousins kids $16,000 and then funded ESA for them. Unfortunately my cousin passed away this year.

He wasn't an outstanding student himself as he was easily distracted. I wanted to honor these kid's dad and and ESA was my way to tell them that there are people looking out for them even now.

Bill - you are correct in your thinking but need to update amounts.

Another way of avoiding it indefinitely is to give away less than ~$12,000,000. That way is going to work for me.

If a LOT of you have a problem because you're going to be over the $12,000,000+ threshold then, well, that doesn't sound like TOO much of a problem to me... I'm sure you'll be fine if you have to pay some taxes...

I think this was a great post though, BillW! I think LOTS of people think that the sender or receiver have to pay tax on gifts. It just isn't accurate for most people. We're talking about a $12,000,000+ threshold. Most people aren't going to have to worry about that -- but LOTS of people -- with WELL under that amount -- think that they will have to worry about it.

I hear people complaining about a "federal inheritance tax" now and then -- no such thing even exists! And the "federal state tax" only really applies to assets over that $12,000,000!

People just like to complain. :) In any case, it's a good post by you, IMO.

Just like lots of people have no idea how tax brackets work. Again, all the time, you'll hear someone afraid of making a tiny bit more and "pushing them into the next tax bracket" and then "actually losing money because of the higher tax." Um, yeah, that's not how tax brackets work...

In any case, keep informing people! :)

And a Merry Christmas to you too!

I typo'ed and missed a letter in there. I meant "federal estate tax" (not "federal state tax").

Well gee John, thank you! That was a nice Christmas gift you just gave me there! And another big laugh on that "People just like to complain. :)" I'm still laughing.

I thought we already covered this in a recent other topic, and I posted a lengthy response...which I don't care to do again...so here is the short version.

Bill you are correct. And dino's comments are pretty close to what I would have said...but a couple minor notes:

1) Your tax preparer may charge you extra for filing the extra form...are you ok paying an additional $150? If so, go for it.

2) The $12M lifetime exclusion is set to "sunset" in a future year...I believe 2026. At that time it will revert to half it's current value. And, don't forget this...it's set by our elected officials...so they COULD lower it to $100,000 if they wanted to. How much do you trust your elected officials?

3) Both the lifetime exclusion and the annual gifting limits are adjusted annually for inflation, so they may/will change annually.

Thanks Hoosier and don for the clarifications on that!

And just to be clear, my point on this post was to tell everyone that gift taxes are only paid when the lifetime (not annual) limits are exceeded, and right now that lifetime limit is in the millions. That is all I meant to say.

Also, to note it, "not too long ago" varies quite a bit, I guess. The exemption hasn't been as low as $1,000,000 in almost two decades (2003).

For reference since it has been mentioned a few times above, but without all the figures...

For 2022, it is just over $12,000,000 (then 40% tax after that). For 2023, it will be just under $13,000,000. That is set to expire in 2025. If nothing changes, it will revert to its pre-2018 level -- which was around $5,500,000 (also at 40% after that).

2 other things I didn't mention.

When the first spouse dies, if he/she does not use up his/her 12M exemption, the remainder can be passed to the second spouse. A form 706 needs to be filed to elect this. Could shelter more money if last spouse wins lottery.

Also, states may have different exemptions. Illinois' exemption is 4M. If a wealthy person dies they won't owe federal tax if under 12M but may owe state tax if over 4m.

John,

If you think paying 40% of the value of what you’ve acquired over life is “some tax” you’re definitely not my kind of people. I don’t care if there is an exemption on some of it. Taking 40% of someone’s life’s work simply because they died should be a crime. If you wouldn’t want it to happen to you you shouldn’t wish it to happen to anyone else just because they saved or earned more than you did.

LisaFL: Correction: you're paying 40% of the value of what you've acquired over life OVER $12,000,000.

That's the point here. Most of us will not have more than $12,000,000 when we die. By current rules, you'd therefore pay 0% federal estate tax.

I simply said that I think a person that has $12,000,000+ left over after they die will "be fine" if they have to pay tax on the amount over $12,000,000...

Oh, and I also think it is fine if people who make more money pay more taxes. That isn't a "wouldn't want it to happen to you so you shouldn't wish it to happen to anyone else" situation.

If I make millions, then I expect to pay more taxes. If someone else makes millions, then I expect them to pay more taxes. Again, that isn't wishing anything on someone else that I wouldn't want. I fully expect people who make more money to pay more taxes -- even if it is me.

Guess it all depends on perspective.

If the government is doing this - it is us paying our fair share.

If we raise rents to cover any type of taxation- we are selfish greedy monsters.

Don: I tend to agree on the 40%. I'm curious what numbers would be acceptable to you? 25% after a $5MM threshold? 30% after $10MM?

Also, it is interesting... But a lot of times that people have $12,000,000+ to worry about after they die, it turns out that most of that was made on capital gains over the years. At <15% tax. So, did they really pay their "fair share"? I think it is more complex than "I already paid my tax on this" sometimes.

Finally, how many people here are planning to take their properties (often through 1031 exchanges) to their death? Where they have kicked the gains taxes down the line until they die and the basis resets for whoever inherits? And they basically pay none of that "deferred" tax? That seems to be a very popular plan with landlords. How come no one is jumping up to argue about "fair" taxes then? Those "deferred" taxes suddenly vanish at death. They were never "taxed when earned"...

I laugh whenever there is talk of "fair share" of taxes, because what is "fair" is so subjective. Usually, what is fair to someone is any setup where they pay less and the other guy pays more. I am not a billionaire, but I do not begrudge billionaires there success.

John, I agree that property with accumulated cap gain should be taxed at death, but on earned income that has already been taxed, I do not think that there should be any estate tax. The way I see it, if I earn $100k in a year, I am lucky if I end up with $50k after local, state, and federal taxes. That $50k is mine to enjoy; the gov't already took half of my value. If rather than enjoying it myself, I want to leave it to someone else to enjoy, why should the gov't get another crack at it.

Don: I agree with you in theory based on your example (making $100k and keeping $50k). However, as I said above, very often when we're talking about $10,000,000+, much of that money came from capital gains taxed at much less than your example. I sometimes see it similarly to the loophole with property not having to pay capital gains. Not exactly the same, of course, but still quite a ways from your keeping-only-50% example.

But, yes, I actually agree with you -- IF a person saved up $14,000,000 from their WAGES that were taxed at normal non-capital-gains rates their entire life... Then they should be able to give the $14MM to someone without paying extra taxes. (Or, at least, certainly not 40%.)

All that being said, I still think too many people worry about this who will never have more than the threshold of $12,000,000 to give to someone. I see people getting riled up about this who will never, ever have to worry about it. :)

Don: My gain isn't over $14,000,000, so this doesn't apply to me. But, correct, in general, I feel that people making $10,000,000+ and paying only Capital Gains on that are likely not paying "enough."

Again, your example was people paying normal taxes based on WAGES (i.e. not capital gains rates). For that, I agreed with you -- they paid their "fair share" and should be able to give it all to someone without paying extra taxes.

But, for those that paid only 20% because they made their millions from capital gains -- while the rest of us paid normal wage-based taxes at a higher rate... No, I'm not sure they paid "enough" relative to everyone else. And I'm fine if their estate over $14,000,000 gets taxed when they die.