Many of our clients in Ohio often inquire about the Ohio gift tax. Our job is to understand how gifts are taxed. It is an area that many CPAs and estate attorneys don’t often grasp.
In this post, we will try to provide a simplified approach to understanding how gift taxes work. The goal is to offer a few tips and pointers along the way.
Table of contents
What is the gift tax?
A gift occurs when transferring something of value to an individual, and fair value is not received in return. The transfer is measured monetarily and can be indirect. If something is sold for less than fair value, a gift could have been made.
The individual making the gift usually is responsible for paying any gift tax liability. In a few situations, the recipient of the gift may agree to pay the gift tax. But in reality, this seldom happens.
Ohio Gift Tax
Fortunately, I have a pleasant surprise. Ohio does not assess a gift tax on its residents.
State gift assessments are actually relatively rare. Only 12 states levy an estate tax, and very few actually have a gift tax. In many situations, people can gift away their entire estate to avoid a state-level estate tax.
What is the gift tax exclusion?
The IRS gift tax exclusion allows individuals to give away up to $15,000 each year to as many folks as they wish without needing to file a gift tax return. In addition, these gifts do not count against the lifetime exemption amount.
A married couple with three children will allow each spouse to give away $15,000 to each kid annually. This is $45,000 for each spouse and a total of $90,000 for the couple.
Any gift made to a person over the $15,000 exclusion is considered a “taxable” gift. But no tax is owed unless the taxpayer has exceeded the lifetime exemption. But a gift tax return must still be filed.
Are there any tax-exempt gifts?
Specific gifts are exempt and excluded from the gift tax. Any gifts made or contributed to the following organizations are excluded from the gift tax:
- IRS-approved charitable entities;
- Spousal gifts (assuming they are a U.S. citizen);
- Payments for another person’s medical costs (must be paid directly to the medical provider);
- Payments for another person’s college or tuition expenses (must be paid directly to the institution). Any payments for lodging, books, and meals will not qualify for the exception. However, these can be paid directly to the student using the annual exclusion.
Gift planning is a critical part of most estate planning strategies. Making annual gifts is one of the best ways to reduce your taxable estate without requiring you to liquidate real estate or other holdings. Thankfully, you won’t have to worry about the Ohio gift tax.