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2 reasons you may have to worry about paying a gift tax

On Behalf of | Mar 11, 2022 | Estate Planning |

Federal tax is applied to almost all of your assets and income. Even your property and other assets you own when you die may be subject to tax again even though you paid taxes on it.

Estate taxes levied by the federal government can mean up to a 40% tax rate on the property you leave for your loved ones when you die. People make gifts while they are still alive to reduce those taxes, but those gifts might trigger a federal gift tax. When will your loved ones have to pay tax on a gift?

When you give them too much in one year

Regardless of how much you have, you can only give a certain amount to people annually without putting them at risk of tax obligations. In 2022, people can give up to $16,000 in gifts to one person per year without incurring gift taxes. Giving someone a vehicle or an investment account could be enough to trigger those taxes.

When your lifetime gifts exceed the estate tax exemption

Under federal law, people may have to pay estate taxes when the total value of their estate goes over $12,060,000. Gifts are often part of the way that people avoid those taxes, but the gifts themselves cannot exceed the maximum value of an exempt estate. If the gifts made to your various family members and loved ones over the course of several decades eventually total more than $12,060,000, then your extreme generosity will be what triggers federal gift taxes.

Many people need to combine gifts with other tax planning strategies so that their loved ones don’t wind up liable for a big tax bill. Understanding the laws that govern the federal gift tax will make estate planning easier for you.