Gift tax is a pretty complicated matter that often confuses taxpayers as well as CPAs and legal professionals.
Commonly, a person can make a taxable gift without even knowing about it. The opposite is also true, and people are missing out on gift tax exclusion. Not to mention that in many cases, taxpayers are not even sure who exactly is responsible for paying the gift tax due.
In this article, we shall go through the nature and principle of gift tax in South Dakota and some crucial points everyone should know about making and receiving a gift in the state.
What does the gift tax apply to?
To understand the nature and application of the Gift Tax, let`s clarify what a Gift is from the fiscal point of view.
There are several scenarios:
- A gift is any kind of non-repayable transfer to another individual;
- If the payment is significantly lower than the fair market price for the transfer, it can also be considered a gift;
- A loan made at a reduced rate or the one free from interest is technically also a gift.
The gift tax can be applied to property and transfers like real estate, cash, stock, etc. Moreover, it remains applicable regardless of whether the donor considers the transfer as a gift or not.
Does South Dakota have a Gift Tax?
South Dakota does not impose a gift tax on its residents. Very few states actually do.
At the same time, there is a federal gift tax exclusion that allows each US citizen to give away up to $15,000 each year.
If you happen to give someone more than $15,000 worth of gift, you should report the transaction to IRS. The exemption amount is counted against the lifetime gift tax exemption ($11,18 million), which reduces your federal estate tax exemption.
However, you can shelter a gift worth over $15,000, splitting it with your spouse and taking advantage of their exclusion for a gift.
Unless you went over the lifetime gift tax exemption, you don`t owe any gift tax on transactions you make every year. However, you are still obliged to report the taxable gift and file a gift tax return.
While there is no gift tax in South Dakota, it impacts only about 1% of all American taxpayers due to the federal gift tax exclusion. Nevertheless, you may still have to file gift tax returns.
Moreover, making up to $15,000 gifts every year will significantly (and legally) reduce your taxable estate.