So, you have decided to give your relatives a gift, you spent many hours choosing the perfect one, and now the tax authorities are demanding tax for this gift you bought them. What is a US Gift tax and When does the tax apply? keep reading.
Could it be legit? If you are a U.S. citizen, green card holder, or just a property owner in the United States, the answer may be yes.
All the details about the US gift tax and how, if at all possible, it can be minimized –the article below will address these topics.
What is a gift tax?
Unlike the State of Israel, U.S. tax provisions place a tax burden on gifts as well.
The gift tax is the tax levied on the transfer of money or property to another person, with no compensation or with compensation that is not equivalent to the property’s value. The gift tax rate ranges from 18% to 40% of the gift’s value.
When does the tax apply?
The tax is imposed on American citizens, American residents, and even foreign citizens who grant as gifts assets originating in the United States. Sounds like a wide range of cases? absolutely. The tax applied is extremely broad and may create some interesting situations:
An man from America may be taxed for the gift he gave to his relatives in Israel;
A man from Herzliya, who has American citizenship, may be taxed on the gift he gave his Israeli children.
And a man from Jerusalem who has never visited the United States but invests in real estate in the United States and wishes to give them as a gift to his children, may be taxed for this gift.
The broad applicability of the tax, and its high rate, puts at risk many Israelis, whether they have U.S. citizenship or are merely investing in assets in the United States and seek to gift away the investment.
What could be done?
The good news is that the tax provisions establish possible exemptions: annual exemption and general exemption. The bad news is that you will still have to submit a report on the gifts on a separate form (Form 709) and according to the fixed dates for submitting the annual tax report.
Annual exemption
The annual exemption is $15,000 per gift. This means that a gift worth less than $15,000 is not taxable. In fact, even if two gifts worth less than $15,000 were given in the same year, both would be tax-free provided they were given to different people. As detailed below, even if the gift value exceeds $15,000, with proper tax planning a tax exemption might be granted.
General exemption
Lifetime Gift Tax Exemption: In addition to the annual exemption, every U.S. citizen has a general exemption from paying a gift tax at a threshold of $11.58 million.
If, for example, the gift value is $40,000, the annual exemption can be used for $15,000, and the remainder of the amount – $25,000 – can be offset with the general exemption. After the use of the general exemption, its balance will be $11.23 million. This amount can be used later in life. Thus, if in the following year the citizen receives an additional gift of $100,000, he will be able to use the annual exemption of 15,000, and the balance of 85,000 to offset against the balance of the general exemption at his disposal – in the above case $ 11.23 million. After offsetting this amount, the remained general exemption will be available to the taxpayer for an additional $11.14 million. And so on.
It is worth noting that the general exemption applies only to American citizens. This means that foreign investors who invest in the United States and wish to transfer their investment as a gift will not receive the following exemptions and will pay a gift tax on any gift value. However, rigorous tax planning may minimize tax liability in these cases.
As we can see, despite the broad applicability of the tax and its high rate, understanding the relevant tax provisions may minimize and even dimminish the obligation to pay the tax.
Exceptions to tax applicability
Beyond the exemptions, there are additional gifts on which you will not have to pay tax or even without using and taking advantage of the different exemption.
Here are some types of gifts for which no gift tax will apply:
- Gift transfer between spouses who both have U.S. citizenship – tax-free regardless of the sum.
- Payment for another person’s medical expenses is tax-free.
- Payment for tuition fees paid directly to the educational institution – tax-free.
US Gift Tax – In details
- Gift – transferring money or property with no return or with a return that is of lesser value than the value of the property.
- Exceptions – in the following cases there is no gift tax obligation
- Gifts gifted between a couple who both hold American citizenchips
- Paying for someone’s medical expenses
- Paying for someone’s tuition fees if the payment is paid directly to the educational institution
- Exemptions– if the gift does not fall under one of the exceptions, the exemptions can be used-
- An annual exemption on gifts worth less than $15,000 per gift
- Every U.S. citizen has a general exemption from paying a gift tax at a threshold of $11.58 million
- Gift tax – if there are no exceptions or the exemptions do not fully cover the value of the gift, a gift tax rate that ranges from 18% to 40% of the gift’s value will be paid.
As you can see, even a simple matter like giving gifts can be a complicated challenging matter. The experienced and skilled staff of MesAmerica will be happy to help you and answer your questions.
