When you give gifts to heirs in Florida, what are the tax implications, and who pays the tax? The good news is that the recipient of the gift, even if it is cash, does not owe any taxes to the Sunshine State. The reason is: making a gift to an heir in Florida is not considered income under the state tax code. On the other hand, the giver of the gift may owe federal taxes under certain conditions. You can rest assured the government is not trying to discourage gift-giving, but, at the same time, is trying to discourage gift-giving as a means of avoiding real estate taxes. In days gone by, it was common for wealthy people to give property gifts in order to avoid real estate taxes.
Fortunately, the IRS is quite flexible with gift-giving and is only concerned with larger gifts. For the majority of Americans, gift-giving should not be of any concern. It is an issue that concerns mostly wealthy people.
The Gift Tax
The gift tax is a federal tax that applies when large amounts of money or real estate are transferred to another individual. The gift tax rates range from 18%-40%, and, more importantly, the gift tax is a burden only potentially faced by the giver and not the recipient.
The annual federal gift tax cap is set at $16,000 per person for the year 2022. What this means is that you can give multiple gifts to several different people without incurring any gift tax as long as no single recipient receives more than $16K in value. The annual exclusion cap is reset each year so that the following year you can again give $16K per person. And your spouse also receives the same gift tax exclusion, allowing a married couple to give gifts totaling up to $32K to each of their children without triggering the gift tax.
Because there is a lifetime exemption, even if the gift exceeds the annual cap exclusion does not necessarily mean a payment is required to the IRS. The lifetime exclusion currently stands at $12.06 million. When this cap is exceeded, it triggers the IRS gift tax. The taxpayer then has the option of paying the gift tax in the current year or applying the gift towards the lifetime exemption.
Filing A Gift Tax Return
When you give gifts to heirs in Florida, a special form is required to be filed. The IRS keeps a record of the exemptions used when giving gifts. When the taxpayer gives a gift to another individual worth more than $16K in a single year, the IRS must be notified by filing Form 709. The form will ask for details like the value of the gift, the name of the recipient, and the amount of lifetime exemption the gift donor wishes to claim. If the gift is not cash, its fair market value should be used. For example, if you bought a house ten years ago for $200K and the fair market value in 2022 is $500K, it is the latter value that must be filed. Items like jewelry, antiques, and paintings usually require a recent appraisal to deem the fair market value.
What Qualifies As A Gift In Florida?
For tax purposes, making a gift to an heir in Florida includes any property, cash, or other assets that you give to another person or entity without the expectation of anything in return. This can include cash in any form, real estate, interest-free loans, personal possessions like art, paintings, jewelry, etc., and other assets, like stocks.
What Assets Are Exempted From The Gift Tax?
Not every gift is subject to the gift tax, and they include the following:
- All gifts to your spouse irrespective of the value
- Making tuition payments for someone else
- A contribution made to a political organization
- Donations made to certain tax-exempt organizations (usually non-profit)
- Medical expenses paid for someone else
- Gifts to any registered charity
- A loan is made to someone as long as no interest is charged, and repayment terms are generous
If you have a large estate and want to lower the tax implications, here are some tips:
Decrease the size of your estate: You can do this by giving the maximum amount of gift to as many individuals you want in one year without having to report it, provided the gift value is less than $16K for each person.
Consider a trust fund: There are several types of trust funds that can help lower your tax. However, it is best to consult with an estate lawyer who has experience dealing with trust funds. Once a trust is created and a beneficiary is named, according to the IRS, these assets are no longer your property. This can significantly reduce your tax burden. You can create trusts with your retirement account, savings accounts, all your investments, stocks, etc.
In general, making a gift to an heir in Florida will not require any taxes to be paid. The federal gift tax cap will not be as relevant to the average American as it is to those who are considered wealthy. With a lifetime exemption of $12.06 million, most Americans would never be able to give gifts up to that amount. If a wealthy person were to give a property worth $6 million and a 100-foot yacht worth $6 million to his son, the lifetime cap would be reached in just one year. Once the lifetime gift exemption cap is reached, the federal tax rate can quickly climb to 40%. Consult with Elder Care, PA today to learn more about the gift tax and how to protect your assets.