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Curious about gift taxes? Join Ralph Estep, Jr., as he dives into the world of gift giving and an exploration of gift taxes! Learn about exemptions, exclusions, and more.
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Ralph:
Have you ever wondered if you're going to need to pay taxes when giving or receiving a gift?
Ralph:
What does the Bible say about gifts and giving?
Ralph:
Well, stay tuned as we dive into the world of gift taxes on today's show.
Ralph:
Welcome to our tax talk Thursday.
Ralph:
I'm so glad you chose to join us.
Ralph:
I just want to thank you for listening and more importantly, supporting the program.
Ralph:
I'm coming to you from the Estep Farm and it is a beautiful sunny day here today.
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And I'm recording this from the Saggio Accounting studio.
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So let me put on my podcaster hat and put down those overalls and let's push that adding machine to the side.
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Let's get into some financial wisdom from a Christian perspective.
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Today, we're talking all about gift taxes.
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What are they?
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And how do they impact both the giver as well as the receiver of these gifts?
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I know the topic of taxes.
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Isn't always the most fun, but understanding gift taxes can save your loved ones, big headaches down the road.
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As second Corinthians chapter nine, verse seven reminds us God loves an honor's generous giving when it comes from the heart.
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So let's unpack what you can freely.
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Give and receive without tax troubles, getting in the way.
Ralph:
Now don't forget to subscribe to the show and join our email list.
Ralph:
You do that at askralphpodcast.com . So you don't miss tomorrow show.
Ralph:
Tomorrow, I'm talking about self storage.
Ralph:
Is it your friend or is it a money sucking foe?
Ralph:
That's right.
Ralph:
Folks.
Ralph:
We're going to talk about the value and maybe the exorbitant costs of self storage And whether it's a good decision for you.
Ralph:
Well, let's start with today's Bible verses.
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I said today's Bible verse comes to us from second Corinthians chapter nine, verse seven, and it says this.
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Each of you should give what you have decided in your heart to give.
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Not reluctantly or under compulsion.
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For God loves a cheerful giver.
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I think that's a great way to start today's episode.
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So let's start by asking this first question, Ralph, what exactly is a gift tax?
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Well, simply put it's a federal tax that applies when you transfer property or cash to another person for nothing.
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They're not buying it from you or significantly less than it's worth.
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There are exclusions and exemptions, but essentially.
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Gift taxes come into play when money or assets.
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Those are things that you own exchange hands and the giver doesn't get something equal in value in return.
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So you're giving something to somebody and they're not giving you something back.
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The government wants their slice of large financial gifts to prevent people from avoiding paying estate taxes.
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When assets pass hands after someone dies.
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That's the whole point here.
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The government wants to get their hands on those things that are being transferred from the person who passed away on to the next person generally.
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And this is a general statement.
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You won't owe ordinary income tax on gift money you receive.
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So in general, from a very high level, if you receive a gift, you generally aren't going to pay any tax on that.
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But for the giver, it's the person who's giving the gift.
Ralph:
You might know gift taxes.
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When the gifts you give over a lifetime and at death exceed the lifetime gift and estate tax exemption amount.
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We'll get into the details of that in a moment, which right now set a $12 million.
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So to be frank, it's not going to affect many people.
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But again, there are exceptions and exclusions that mean most everyday folks don't need to worry about owing gift taxes.
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Well, let's break down those exceptions.
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The most common gift tax exemption is called the annual gift tax exclusion.
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This means any individual can give up to the annual exclusion limit per recipient each year without having to pay gift taxes on it, or report a gift to the IRS.
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Now in 2024, this annual amount is $18,000.
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What does that mean Ralph?
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Well, that basically means that each person can gift up to $18,000 per person per year with no tax implications.
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So for example, Let's say you're a family.
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You have three kids, you and your spouse could each give a gift of $18,000 to each child without any reporting requirements or owing gift taxes.
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That's $108,000 in tax free gifts between the two of you to your family that year.
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So that's 18,000 for you, 18,000 for your wife, times three because, you have three children.
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This applies to any individual you give money or assets to.
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These could be your relatives.
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Your friends could be peers.
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in church even rolling over inheritance into a spouse's name without needing to report it.
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There's no limit on how many separate gifts can qualify for this annual exclusion.
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So if you've got a host of friends, you got 30 people that you want to give $18,000 to each.
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You can do that without triggering any tax issues.
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If you're giving above that $18,000, to someone the excess gets factored into what's called your lifetime gift estate tax exclusion.
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Which I mentioned a little while ago is $12 million in assets.
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that's what you can give before you owe any taxes and truth is.
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For 99% of people we won't ever hit that limit on our lifetime gifts or states.
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But talk to a tax pro.
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If you have any doubts,
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another exception is not having to count and gifts use to pay certain direct medical expenses.
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If you paid medical expenses for someone.
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Or tuition against the annual or lifetime gift tax exclusion.
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So funding, medical procedures or college tuition for loved ones, also avoids gift taxes without dipping into your $18,000 annual exclusion per recipient.
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So here's the thing, folks, clever gifting strategies like these help us, your gift taxes, never keep you from generous giving.
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And that's the whole point.
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We want to figure out a way to help you to be a generous giver.
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Now, what about on the receiving end?
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Do you owe ordinary income taxes when given cash or assets of a gift?
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And like I said, generally, the recipient of a gift does not have to pay income taxes on the value of that gift.
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Now some specific examples, like inheriting an IRA or a 401k, you may have distribution taxes to the beneficiary, but gifts wouldn't create that taxable event.
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So in other words, if someone gifts you at the time of their death, their IRA or 401k, you really take the role as a beneficiary.
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And that tax rule is completely different because that is pre tax money.
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Again, I'm going to recommend you talk to a tax pro.
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If you have specific inheritance questions.
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One area that commonly trips people up being given a sizeable gift to help with a house down payment.
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I get this question repeatedly in my practice and here's the answer.
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Even large cash gifts for a home purchase, do not create taxable income.
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But here's the deal folks, make sure the gift giver properly reports the gift.
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If it is over the annual exclusion amount to avoid issues with the IRS on their own gift tax returns that they need to file with the IRS.
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So it's going to be over that $18,000.
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There may be a tax return that needs to file, but the good news is no income taxes for you, the lucky recipient.
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So if your folks want to give you money for down payment on a house, there is absolutely no tax consequence to that gift for you being in the receiver.
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Now your folks may need to file a tax return.
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That's where they're going to want to talk to a tax professional like myself about that situation.
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So let's talk for a moment about what is called the lifetime exclusion.
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You've heard me mentioned that a few times.
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The lifetime exclusion, or you've heard it called the lifetime gift and estate tax exemption works together with the annual gift tax exclusion, but they serve different purposes.
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Here's an explanation.
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The lifetime exclusion refers to the total amount you can give away tax-free during your life or at your death before owing any federal estate or gift taxes.
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This lifetime exclusion amount is over $12 million per individual.
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That's now in 2024, and it includes all taxable gifts.
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Exceeding the annual exclusions given over your lifetime.
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Plus the total value of your estate when you pass away.
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So what is Ralph really talking about here?
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If the total value of all the things that you own on the day you die is less than $12 million.
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Then there's never going to be an estate or gift tax issue.
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Only on very large lifetime gifts.
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or estates exceeding the $12 million plus lifetime exclusion would have to pay any gift or state taxes?
Ralph:
So how does the annual exclusion fit in.
Ralph:
It's a very good question.
Ralph:
The annual gift exclusion allows individuals to give up to $18,000 per year.
Ralph:
Now, according, like I said, that's according to 2024.
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Per recipient.
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Without a counting against that lifetime exclusion amount.
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annual gifts under the $18,000 aren't reported or tracked because they don't reduce your lifetime exclusion amount.
Ralph:
Basically what I'm saying is if you have a very large estate, that's getting close to that $12 million mark.
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One of the things you might want to consider is gifting that money each year to reduce that value of that estate because these $18,000 annual gifts do not count against that lifetime exclusion.
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So let's say you had three or four kids, you and your wife could each give, like we talked about earlier that $108,000 a year.
Ralph:
to reduce that lifetime exclusion amount.
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in summary.
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Lifetime exclusion gifts or estates values beyond $12 million.
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Then you're going to hit that gift of state tax limit.
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The annual exclusion.
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We talked about this a lot today.
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$18,000 in annual gifts to each recipient aren't reported or counted against that lifetime amount.
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So the two exemptions work in tandem, they work together.
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The annual exclusion enables tax-free smaller gifting without tapping into the bigger lifetime exclusion cap each year.
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Now listen, folks, most people will never exceed either limit, but they give substantial tax free gifting flexibility.
Ralph:
Before we wrap up, I want to remind our listeners to visit our podcast page, do that at askralphpodcast.com . There you can leave us a review, share your thoughts, or even send us a message with questions for future episodes.
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We're building our calendar right now.
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And if there's a topic you'd like for me to cover, I would love to hear from you.
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Make sure while you're there, you join our email list so we can send you our daily email with what's going on with this show.
Ralph:
And if you have a specific question, you can also schedule a consultation with me.
Ralph:
For example, let's say you want to talk about some of these estate or gift tax issues.
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I be happy to meet with you.
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We can do a zoom meeting, but you can schedule that right from the website.
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And here's one thing I want to ask you to do.
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If you know, someone who is considering giving a gift or will be receiving a gift, do me a favor and share this episode with them.
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It might be a great starting point for them to have these discussions.
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To recap, the key takeaways on gift taxes are these gifts up to $18,000 fall under the annual exclusion limit each year.
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And they're not taxable.
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And they don't use up that lifetime gift and estate tax exemption amount,
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direct payments for school and medical expenses.
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Also avoid these gift taxes.
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Recipients don't owe income tax on gift money.
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And as we talked about the lifetime exemption over $12 million means most people.
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Won't ever get close to owing actual gift taxes.
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So let's talk about some actionable next steps.
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If you've been blessed enough to gift money over $18,000 to loved ones or received sizeable gifts, yourself, talk to a tax professional to make sure they handle the reporting properly on your returns.
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And always, always, always.
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Get valuations on any non-cash asset gifts, those would be things like maybe.
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Art collections or something like that.
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And if giving money for a specific purpose, like education or medical expenses, make sure you document how those funds were used.
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Get a copy of the receipt, get a copy of the medical bill or the tuition bill
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Staying organized with good documentation helps everything pass IRS scrutiny.
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If those tax forms ever get reviewed later on.
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So have the proper documentation, proper planning sets up both the giver and the receiver for smooth sailing.
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And as the Bible reminds us.
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Approach gifting from a heart of generosity.
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No matter the amount our riches come from above.
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So stay focused on stewarding worldly goods.
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Rather than being anxious about every tax consequence.
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Seek wisdom.
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And righteous motives.
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I pray our talk today has blessed you with greater confidence to give freely.
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Receive thankfully, and nurture an attitude of generosity that honors Christ.
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Again, head over to our website at askralphpodcast.com and share this episode on gift taxes.
Ralph:
If you found it helpful, please feel free to reach out with any followup tax questions anytime.
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And as I always say, Stay financially savvy, and God bless you today.
