You may have heard that gifts are an excellent way to reduce estate taxes. When you take the right approach, gifts can be very useful, but it’s important to first understand how gift laws work in your state. If you live in Washington State, keep reading to learn how gifts are governed and how they can benefit you and your loved ones.
What’s the legal definition of a gift?
When you give away something of economic value, with no expectation of compensation or repayment, it’s considered a “gift.” Washington gift law excludes a few select things from the legal definition of a gift, such as:
- Something given to influence a state officer or state employee
- Items the recipient gave back to the donor or donated to charity within 30 days
- Campaign contributions
- Employee discounts
- Awards, prizes, and scholarships related to academic or scientific achievements
What is the gift tax in Washington State?
As a matter of fact, Washington has no gift tax. If you live in the state, your gifts will only be subject to the federal gift tax on gifts you make throughout your life. Thanks to the “annual exclusion” provided under federal law, you can give up to $14,000 a year to discrete individuals without paying taxes. If you’re splitting gifts with a spouse, the tax-free maximum is $28,000.
Please take note that these numbers may change annually, so consult the IRS website regularly along with other relevant authorities for the most up-to-date figures.
Does the recipient pay taxes?
No. Generally speaking, the person who receives your gift will get the full amount without paying any taxes, and they won’t have to report the gift unless it came from a foreign source.
What happens after the $14,000 mark?
If your gift to any person exceeds $14,000, you’ll have to report it on a Gift Tax Return (IRS Form 709) for that year. You will also have to file Form 709 if you’re splitting gifts with your spouse, even if none of the gifts are taxable.
Can I gift $14,000 as many times as I want?
Yes, but only up to a certain point. Based on the 2017 calculations, you can give away up to $5,490,000 during your lifetime before you’ll need to pay additional taxes. If you exceed that amount at some point in your lifetime, you’ll pay a 40% federal gift tax on all other gifts past that amount.
There’s one more important point to keep in mind: the $5.49 million exemption is a “unified credit,” meaning it applies to both your gift and estate taxes combined. That means whatever portion of the exemption you use for gifting will reduce your allowance for estate taxes. Surviving spouses are allowed to claim any part of the exemption that wasn’t used by the deceased spouse.
As long as you leave yourself enough money to live on, you can greatly benefit your loved ones by gifting up to $14,000 per person per year and keeping your taxes at a minimum. Be aware that gift and estate tax exemptions and exclusions change on an annual basis, so make sure you consult the IRS website or another official source for the latest numbers.
To better understand the use of gifts as an estate planning tool, get in touch with the attentive lawyers at Estate & Long Term Care Group. We can provide you with effective strategies to minimize taxes and maximize the amount you leave behind for loved ones.
Written by ELTC Law Group
