Gift Tax
The Gift Tax applies to transfers of property as a gift unless it is:
- Valued below the annual exclusion limit of $15,000.
- A deduction for a qualified charitable gift.
- A qualified transfer to the donor’s spouse, otherwise known as the marital exclusion.
For example, Tim, a wealthy business owner, gives his nephew a pristine-condition vintage 80s sports car currently valued at $20,000. Surpassing the exclusion limit, Tim will have to file Form 709 and report the transfer of that car and pay the gift tax associated with it.
Exclusions & Deductions
Certain items qualify as exclusions and deductions towards the calculation of the gift tax. In addition to the annual exclusion, any gift amounts paid directly to a medical provider or education organization are excludable. So for example, a rich aunt that pays a university for her niece’s first year of college tuition would be an excludable gift amount. However, any amounts paid for boarding are not excludable. The marital deduction allows spouses to transfer property to each other an unlimited amount. Charitable deductions are calculated based on the FMV of the donation minus the annual exclusion.
Gift Tax Formula
In short, the gift tax is calculated as:
Value of gift amount
– Exclusions (such as the $15,000 exclusion)
– Deductions (such as charitable deductions)
= Taxable gift for the current year
+ prior year taxable gift amounts
= Taxable gift amount to date
x Tax rate
= Tentative gift tax
– (prior year gifts x current tax rates) – (unified credit)
= Gift Tax Liability
Ok, so maybe it’s not that short. But this formula takes into account any previous taxable gift amounts and liabilities.
Most taxpayers will not have to worry about the gift tax, but business owners who may consider transferring gratuitous amounts of property to families and loved ones should take heed of potentially incurring that gift tax. Having a knowledgeable tax and accounting team to provide guidance on such matters for business owners can prevent a lot of future complications. Just like us here at MiklosCPA. We are a California-based accounting firm that helps many small and emerging businesses with their tax and accounting needs. Schedule a chat with us to learn more about our services, and please subscribe to our social media channels for future useful pieces of accounting and tax knowledge!