Our Colorado clients often ask us questions regarding the Colorado gift tax. Since all we do is address estate planning concerns, our job is to review and analyze gift tax issues and offer solutions to our clients.
In this guide, I will review how state and federal gift taxes work. I will discuss the various laws and requirements and also provide some tax strategies along the way.
The following table outlines the Colorado gift tax rules:
| Issue | Amount or Percent |
|---|---|
| Federal Exemption | $16,000 |
| Colorado Exemption | N/A |
| Federal Rate | 40% |
| Colorado Rate | 0% |
Table of contents
How does gift tax work?
A gift is when an individual gives something to another individual and receives back nothing or something less than fair value. It also includes selling something for less than what it is worth or making a reduced rate loan or even an interest-free loan.
The tax is imposed on a gift made over the annual exemption amount. The gift can be in cash or property, such as real estate, collectibles, mutual funds, or even business holdings.
What is the Colorado Gift Tax?
The good news for people in Colorado is that Colorado does not levy a gift tax on residents.
State-level gift taxes are actually quite rare. Only twelve such states in the country even have an estate tax, and very few assess a gift tax. People can often gift away their estate to avoid an assessment at the state level.
Annual gift tax exclusion
The federal gift tax laws allow a person to give away up to $15,000 each year. A gift can be made to an unlimited number of people, and there is no need to file a tax return. It will not even count against the person’s lifetime gift exemption amount.
A couple with three children can gift away up to $15,000 to each child annually. This would be $45,000 per spouse or $90,000 in total for the couple.
Gift Tax Return Rules & Requirements
When you make a gift over the annual exclusion amount, IRS Form 709 must be filed.
Let’s look at an example. Let’s assume you gave $20,000 to your only child. Since this gift is over the annual exclusion, it is a “taxable” gift. As a result:
- You must file Form 709 to report the $5,000 amount that exceeds the exemption.
- No tax is due unless you have exceeded the lifetime gift exemption amount.
Trust Tax Strutures
You may be confused about Trust Taxation rules if you have multiple trusts and a spouse. In this article, we’ll look at how you can avoid potential issues. The first step is to determine whether or not you’re subject to the inheritance tax. The tax exemption for a trust depends on the amount you have.
For example, if your spouse’s taxable income is $1 million, you can avoid paying taxes on that amount. If you’re subject to the estate tax, you’ll need to know what your taxable income is to calculate how much to distribute.
The 1.643(b)-1 rule allows the trustee to suspend the withdrawal power of a beneficiary. This means that a beneficiary cannot withdraw the money from a trust until the IRS has published the regulations. The rules also allow a trustee to suspend the withdrawal right of a beneficiary in certain circumstances.
For instance, if the surviving spouse is in a divorce or lawsuit, a trustee may suspend the beneficiary’s withdrawal power. If the spouse is a college student, the rules state that any income from the trust is taxable until it exceeds the personal exemption or standard deduction.
A trust is its own taxpayer and has to file and pay taxes if it wants to claim its share of tax deductions. It is responsible for distributing its own assets and paying its own tax liability. The IRS does not consider any of the trust’s income as its own income.
A beneficiary will always receive the full amount of the estate. Nevertheless, the rules are complicated, and should be reviewed carefully. The IRS has yet to publish the final regulations, so the taxing rules may still change.
Conclusion
You should now understand the basics of gift tax at the federal and Colorado state level. Fortunately, the tax will only impact less than 1% of all U.S. taxpayers. But gift tax returns may be required to be filed even though no tax is due.
Strategic gifting can be an excellent estate planning strategy. It is usually the first step in the process for anyone with a large estate.
