When we work with our Washington clients, questions always come up regarding the Washington gift tax. This usually happens when we review the client’s estate situation.
If you are a Washington resident and considering some planning strategies, this article will explain how the gift tax works and examine some of the laws, rules, and requirements. Estate planning can be challenging, so hopefully, you can stay with me.
Table of contents
Tell me about the gift tax?
So what does the IRS consider as a gift? A gift occurs when an individual gives someone something of value and receives either nothing back or something of less value. This definition is all in the eyes of the federal government.
The IRS levies a gift tax when you make a gift over the annual exemption amount. Gifts are usually made in cash, but they also can be made with property, such as real estate, stocks, business holdings, cars, boats, and other personal items.
What is the Washington Gift Tax?
So now comes the good news: Washington does not have a gift tax.
Washington also does not have a limit on lifetime gifting. Any gifts made while you are living can reduce your estate taxes once you have passed away.
But don’t forget that the federal gift tax is still applicable. So careful planning is required if you have a significant estate.
How does the federal gift exemption work?
The federal gift tax exemption allows a person to give away up to $15,000 to someone else annually. This transfer can be made to any number of people and does not require a gift tax return to be filed. It also does not count against the lifetime exemption.
For example, a couple with two kids can gift away $15,000 to each kid. If the kids are married, the couple can also give $15,000 to each spouse. Depending on the estate size, the couple could give away a large portion of their estate over a decade or so.
The Gift Tax Return: Form 709
Form 709 is the IRS tax return that must be filed when a gift is made exceeding the annual exclusion amount.
For example, assume you gave $25,000 to your friend. Because the gift is above the annual exemption, the IRS deems it a “taxable“ gift. As such, the following occurs:
- IRS Form 709 will be filed to support the $10,000 gift made more than the annual exclusion.
- No gift tax liability exists unless the gift was over the lifetime exemption (rarely does this occur).
How to Legally Avoid the Washington Gift Tax
Because Washington does not have a gift tax, you can breathe a little easier. But you still can’t forget about the federal gift tax and the Washington estate tax.
Some strategies can be implemented to reduce your estate. Make sure that you consider the following:
- Lifetime Gifting
- Charitable Remainder Trusts
- Grantor Retained Income Trusts
- Qualified Personal Residence Trusts (QPRTs)
- Grantor Retained Annuity Trusts (GRATs)
- Crummey Trusts
- Minor Trusts
- Special Valuation of Farms and Businesses
- Family Limited Partnerships (FLPs)
- Grantor Retained Unitrusts (GRUTs)
Hopefully, you have a solid understanding of the federal and Washington gift tax. Even though it impacts less than 1% of Washington taxpayers, high earners and people with growing asset bases should take notice.
We commonly use annual gifting strategies as the first step estate in estate planning. Review your estate carefully and have a sincere discussion with your financial advisor, CPA, and attorney about reducing your taxable estate before it is too late.