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Taxable gifts are often a pretty confusing matter. While many U.S. citizens may make taxable gifts without even knowing that, CPAs and legal professionals cannot always distinguish a taxable gift and its fiscal consequence due to taxation differences between states.
In this article, we shall discuss what a taxable gift for New Jersey residents is and when your generosity can cause a federal tax due.
What is a taxable gift in New Jersey?
New Jersey is among those states that don`t impose state gift taxes on their residents. Moreover, the state has also repelled its local estate tax, and it is not relevant for estates of decedents who die after January 1, 2018.
However, New Jersey residents, their gifts, and their estate may still become subject to federal taxation.
Every time you make a money transfer, gift away your property, stocks, or bonds without any payback, you are making a taxable gift if its value exceeds the federal gift tax exclusion of $15,000.
On the other hand, you can still gift away up to $15,000 to as many people as you want every year without affecting your lifetime exemption or having to file the Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return.
Once you are married, the sum doubles, which allows you to gift away up to $30,000 of your wealth for each child reducing the taxable estate part if you have sufficient property in New Jersey, which can become a subject for the federal estate taxation.
Does federal gift tax apply to everyone in New Jersey?
Unlike state taxation, federal gift taxes and estate (or inheritance) taxes apply to all U.S. citizens as soon as the value of the gift exceeds the $15,000 annual mark.
However, there are cases when IRS exempts certain gifts from federal taxation. Those are:
- Gifts made between spouses in case they both are U.S. citizens;
- Donations made to IRS-approved charity and non-profit organizations;
- Payments for medical treatment;
- Payments for education.
The payments mentioned above should be made directly to the institution or organization that provides the service to be considered tax-free.
It is essential to understand the difference between state and federal taxation and remember that even if you live in New Jersey or any other state that does not impose local gift and estate taxes, the federal taxation is still applicable for everyone and can significantly affect your legacy.
However, once you start the estate planning process in advance and manage to stay within the annual $15,000 limit, you can reduce the taxable estate part and lighten the fiscal burden for your heirs.