Our Iowa clients have inheritance tax questions. But questions always arise regarding the Iowa gift tax. This usually comes up when we are discussing the client’s estate.
If you live in Iowa and are doing some estate planning, this guide will discuss the gift tax and review some of the rules, laws, and requirements. Gift planning can be tricky, so try to stay with me.
Table of contents
How does the gift tax work?
Let’s first start with how a gift is defined for IRS purposes. A gift results when a person gives something of value to another person and either receives nothing back or something back of lower value.
The IRS imposes a gift tax when someone makes a gift above the annual exemption. A gift is typically made in cash, but it can be made with property, such as personal items, stock, real estate, business holdings, cars, boats, etc.
What is the Iowa Gift Tax?
So now I have some good news. Iowa does not levy a gift tax.
Iowa also has no limit on lifetime gifting. Any gifts you make while alive will lower your estate tax when you pass away.
But make sure you don’t forget about the federal gift tax. Careful planning is a must if you have a large estate.
Tell me about the federal gift tax
The federal gift tax laws allow someone to give away $15,000 to a person annually. This can be made to any number of individuals, and no gift tax return is required. It will not go against the person’s lifetime exemption amount.
Let’s look at an example. Assume that a couple with three children gives away $15,000 to each child. This is $45,000 per spouse and $90,000 for the couple.
If their children are married, the couple may also give $15,000 to each of their kids’ spouses. Depending on the size of their estate, the couple may decide to give away a significant portion over a period of time.
Gift Tax Return: IRS Form 709
So let’s discuss the gift tax return. IRS Form 709 is the tax return that is filed to report a gift made above the annual exclusion.
For example, let’s assume you give $18,000 to your best friend. Since the gift is above the annual exemption amount, the IRS calls it a “taxable“ gift. As such, here is what would happen:
- Form 709 must be filed to report the $3,000 gift that exceeds the annual exclusion.
- No gift tax is actually due, assuming the gift was not over the lifetime exemption.
How to Avoid the Iowa Gift Tax
As you know, Iowa does not impose a gift tax. But you still could have an issue with the federal gift tax.
There are some strategies that you can implement to reduce your taxable estate. Make sure to consider the following:
- Charitable Remainder Trusts
- Grantor Retained Income Trusts
- Grantor Retained Annuity Trusts (GRATs)
- Family Limited Partnerships (FLPs)
- Crummey Trusts
- Lifetime Gifting
- Qualified Personal Residence Trusts (QPRTs)
- Minor Trusts
- Special Valuation for Farms and Businesses
- Grantor Retained Unitrusts (GRUTs)
Hopefully, you have a good understanding of how the federal gift tax works. But realize that it will only impact less than 1% of Iowa residents. High-income earners and folks with significant assets need to take notice.
We usually use gifting strategies in estate planning. Make sure you discuss with your CPA, financial advisor, and estate attorney about how to lower your taxable before you run out of time.