The gift tax is a federal tax that applies when you transfer assets or property to another individual without receiving something of equal value in return. While Minnesota repealed its state gift tax in 2014, you may still owe federal gift taxes if the gifts you make exceed annual and lifetime exemption limits.
Understanding how the federal gift tax works, along with the rules around tax-free gifts and exclusions, is important for tax and estate planning purposes. This guide will explain everything you need to know about federal gift taxes in Minnesota.
What is Considered a Gift by the IRS?
The Internal Revenue Service (IRS) defines a gift as any transfer of money, assets, or property that you give to another person without receiving something of equal value back. Common examples of gifts include:
- Cash gifts
- Real estate property
- Vehicles
- Investments like stocks and bonds
- Personal possessions like jewelry or art
- Paying someone’s tuition or medical bills
Any transfer made out of detached generosity and without an expectation of compensation is likely to be treated as a gift by the IRS. Even forgiving a debt can be considered a gift in some cases.
What is the Annual Federal Gift Tax Exclusion?
While the federal government taxes gifts above a certain value, you do get an annual gift tax exclusion. For 2023, this exclusion amount is $17,000 per recipient.
This means you can give up to $17,000 each to an unlimited number of people every year without having to pay federal gift taxes or report these gifts on your tax return. Married couples can combine their $17,000 exclusion to give $34,000 per recipient tax-free.
Gifts up to the annual exclusion amount do not reduce your lifetime gift and estate tax exemption. However, any amount you gift over $17,000 to a single recipient in 2023 does start reducing your lifetime exemption.
How Does the Lifetime Federal Gift and Estate Tax Exemption Work?
Along with the annual gift tax exclusion, there is also a federal goblueshield17 lifetime gift and estate tax exemption. This is the total amount you can give away tax-free over your lifetime before owing gift taxes.
For 2023, the lifetime gift and estate tax exemption is $12.92 million per individual. This limit is adjusted periodically for inflation.
When you make gifts over the annual exclusion limit to a recipient, you begin reducing your lifetime exemption amount. Once your total lifetime gifts exceed the exemption limit, you will owe federal gift taxes at tax rates up to 40% on additional gifts.
Here is an example of how the annual exclusion and lifetime exemption work:
- In 2023, you give your son $20,000 for a down payment on a home.
- The first $17,000 is covered by your annual exclusion for gifts to him.
- The remaining $3,000 exceeds the annual limit, so it reduces your $12.92 million lifetime exemption by $3,000.
- You do not owe any gift tax because your lifetime gifts have not yet surpassed the $12.92 million exemption amount.
When Do You Need to File a Federal Gift Tax Return?
You are only required to file a federal gift tax return (IRS Form 709) if you give more than the annual exclusion amount to any one recipient in a tax year.
For example, if you gifted your daughter $25,000 in 2023 you would need to file Form 709 since it exceeds the $17,000 annual exclusion. The return is due by April 15th of the following year.
Filing the gift tax return allows the IRS to track your use of the annual exclusion and lifetime exemption amounts. You are not required to file if your gifts did not exceed the annual exclusion.
What Gifts are Exempt from Federal Gift Tax?
There are certain gifts that are exempt from federal gift tax no matter how much they are worth. You can give the following gifts without reducing your lifetime exemption or needing to file a gift tax return:
- Gifts to your spouse: You can give any amount to your U.S. citizen spouse with no gift tax consequences.
- Tuition or medical expenses: Payments made directly to educational institutions or healthcare providers are unlimited gift tax exclusions.
- Political gifts: Donations to political organizations or candidates are exempt.
- Charitable gifts: Donations to qualified charitable organizations are not subject to gift tax.
In addition, you can make special tax-free gifts even above the annual exclusion amount when contributing to certain accounts like 529 education savings plans.
How to Make Tax-Free Gifts Above the Annual Exclusion
While you are limited to the annual gift tax exclusion for gifts to individuals, there are a few options that allow you to make larger tax-free gifts above this limit:
1. Use gift splitting with your spouse
If you are married, you and your spouse can combine your $17,000 annual exclusions to give up to $34,000 per recipient without reducing your lifetime exemptions. You need to properly “gift split” by signing a gift tax return and electing to split the gift.
2. Make contributions to 529 college savings plans
You can contribute up to $85,000 to a 529 plan in 2023 (5 times the $17,000 annual exclusion) without gift tax consequences as long as you make no other gifts to that beneficiary over the next 5 years.
3. Pay medical or tuition expenses directly
As noted earlier, direct payments for medical bills or tuition are unlimited gift tax exclusions. This only applies if you send the money directly to the institution providing services.
4. Set up an irrevocable trust
With an irrevocable trust, you transfer assets out of your estate while retaining some control over how the assets are managed and distributed. This can reduce your estate’s value for tax purposes. An experienced trust lawyer can help determine if an irrevocable trust is right for you.
Gift Tax Planning Tips
Proper planning around gift tax rules can help you transfer more wealth to loved ones tax-free. Here are some tips:
- Use your full annual exclusion each year to make tax-free gifts.
- Consider creating irrevocable trusts as part of your estate plan.
- Take advantage of special exclusions like 529 plans and tuition gifts.
- Keep detailed records of gifts you make.
- Seek guidance from an estate planning attorney or CPA to ensure you follow gift tax protocols.
Work with a Minnesota Estate Planning Attorney on Gift Tax Issues
Gift tax laws can be complex, but a qualified estate planning attorney can help you develop tax-efficient gift giving and estate planning strategies.
The attorneys at Safe Harbor Estate Law have extensive experience with gift, estate, and trust planning for Minnesota residents. They stay up-to-date on the latest IRS rules and exemptions.
