People love making and receiving gifts. However, one thing is to get a bouquet for your beloved one, and another is to buy them a car.
It is always essential to understand whether you are making a taxable gift to avoid unexpected complications with the IRS. Moreover, this knowledge can help you preserve your legacy for the heirs if you leave behind some sizable estate.
What is a gift, and when does it become taxable?
Any transaction that does not foresee any payback or happens at a “nominal” price, which is lower than the market one, is a gift. Moreover, once you land money without interest or invest in someone’s business, you are making a gift, which can easily be considered as “taxable.”
While the tax rate may reach up to 40%, it is essential to understand, where lies the line between taxable and non-taxable gifts:
- Most US states, including Rhode Island, don’t impose a state gift tax on their residents;
- Even if there is no local gift tax in your state, your gift can become subject to federal gift taxation once it exceeds the annual gift tax exclusion;
- The annual gift tax exclusion of $15,000 provides that you can gift away this sum to as many people as you wish every year without having to file the gift tax return form.
How does the Federal Gift Tax apply to Rhode Island residents?
Once you make a gift over $15,000 in value, you become responsible for the federal gift tax due as a donor even though you are a resident of Rhode Island, a state with no state gift tax.
Moreover, such a gift will affect your lifetime gift exemption.
However, once you are married, there is a possibility to make “joint” gifts, which means that you and your spouse can make a $30,000 gift to one person without fiscal consequences.
This principle is essential for those who want to legally reduce their taxable estate and preserve their legacy for heirs. Although the so-called state inheritance tax (estate tax) is also not relevant for Rhode Island residents, it remains in action on the federal level and can reach up to 40%.
Gifting away your property gradually throughout several years while staying within the federal gift tax exclusion and lifetime exemption rates will help you reduce the taxable part of your estate.