Taxation is a pretty complex matter. Once you fail to comprehend and follow tax legislation, you can find yourself in a lot of trouble one day. Moreover, its principles may vary from one state to another.
For example, most of us don’t realize how often we make and receive taxable gifts. At the same time, the gift tax in Tennessee and its application may be different from those in various states.
Here is some essential information about Tennessee Gift Tax and its relation to your estate planning.
Does Tennessee have a gift tax?
First of all, let’s clarify what a taxable gift is. Technically, it is any transaction that you make:
- Without any payback;
- At a price, which is much lower than the fair market price
Moreover, when you lend someone money without any interest rate or at a reduced one, tax legislation can also see it as a gift.
Technically, the person who is making the gift is the one responsible for the gift tax due. However, there can be two exceptions:
- In rare cases, the recipient of the gift agrees to pay the gift tax;
- Gift tax may not exist in your state.
Tennessee has repealed its gift tax on January 1, 2021. It means that you are not responsible for the state gift tax by making a taxable gift in the state.
Nevertheless, gifts made in Tennessee before January 1, 2012, are still objects for the state taxation. Moreover, there is a federal gift tax, which has an annual exemption of $15,000 for each recipient. In other words, once you make someone a gift that exceeds the $15,000 value, it should be reported to IRS and will influence your lifetime exemption.
That is why selling your house to your child for $1, which means gifting it, won’t let you avoid taxation even in Tennessee. However, once you fit in the annual $15,000-per-person frame, you can reduce the taxable estate.
You can also “split” the gift with your spouse. That way, you can together make a $30,000 gift to one of your children without affecting your lifetime exemption. However, it is essential to remember that your spouse must comprehend and consent to the procedure thoroughly in this case. Moreover, spouses cannot file a joint” tax return. Form 709 should be filed separately.
In most cases, a Tennessee resident won’t owe any gift tax even for “taxable” transfers. However, filling the gift tax return to report the taxable gift to IRS is still mandatory for all state residents.