Minnesota Gift Tax Guide: How 99% of Residents Avoid

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Paul Sundin, CPA

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Minnesota is among the states that have repealed their gift taxes several years ago. However, residents of the state may still appear responsible for the federal gift taxation.

This matter appears pretty confusing for taxpayers and even CPAs, which often leads to misunderstanding and unexpected fiscal complications.

In this article, we shall explain how gift taxation works in Minnesota.

What is a taxable gift?

People may make taxable gifts without even knowing that. Luckily, most taxpayers live in states that don’t impose local gift taxation, and therefore the matter remains irrelevant to them.

However, in some instances, your gift and you as a donor can become a subject for a federal gift tax.

Any transaction that you make without any payback or a “nominal” price or even interest-free money lending is technically a taxable gift. An investment can also be considered as a gift under certain circumstances.

Once your gift exceeds the $15,000 gift tax exclusion set by the federal fiscal legislation, you, as a donor, automatically become responsible for the federal gift tax due.

It means that you have to file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return and the gift will influence your lifetime gift tax exemption or estate exemption.

How Does the Annual and Lifetime Gift and Estate Tax Exemption Work in Minnesota?

The lifetime gift and estate tax exemption are the value of gifts you can make during the lifetime fore becoming responsible for the actual gift tax.

By 2021, the lifetime exemption stands at the mark of $11.7 million, which doubles if we are talking about a married couple. In other words, the matter applies to those who have sufficient property and plan to make a pretty significant transaction, for example, to reduce the taxable estate part.

However, once you manage to gift away $12.7 million with the lifetime exemption of $11.7 million, the IRS won’t hesitate to tax the $1 million difference.

Even though the state gift tax is not relevant for Minnesota residents, the state still has an estate tax, which starts at 13% and goes up to 16% on estates over $10 million.

In other words, the government takes a cut off the legacy you may leave to heirs. And while the estate or the so-called “death duties” does not apply to a wealth below $3 million, you must value the estate properly and take active measures planning it as soon as possible.

The federal annual gift tax exclusion allows you to gift away up to $15,000 to as many people as you wish every year. In case you are married, the joint gifts can be up to $30,000 per person.

Suppose you have three children. It means that you and your spouse can easily cut the taxable part of your estate for $90,000 every year, preserving your legacy for the heirs.

In other words, gift and estate taxation are deeply correlated. Knowing their principles and application at your state and federal level will help you plan your estate thoroughly and protect yourself and your heirs from unexpected adverse side effects.

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