We work with a lot of Texas clients on estate tax issues. Many inquire about the Texas gift tax. Answering these questions is a big part of what we do.
This post will discuss an issue that CPAs and estate attorneys often don’t completely understand. We will also give you a few tips and tricks along the way.
Table of contents
What is the gift tax?
A gift is when a transfer is made to a person, and full consideration is not received back in return. In addition, if something is sold for less than fair market value, you have possibly just made a gift.
The gift tax is a tax on a transfer made over an annual exemption. The tax even applies when the donor does not intend for the transfer to qualify as a gift. The gift tax also applies to property. For example, it can include stocks, real estate, business interests, etc.
Parents often make taxable gifts to their children and don’t even realize that they are taxable gifts. A gift can happen when a parent buys a home for a child or provides a down payment for a house.
Texas Gift Tax
So let’s cut to the chase. I am pleased to report that Texas does not levy a gift tax on its residents.
This is not as rare as you might think. Just twelve states in the U.S. have an estate tax, and very few even have a gift tax. But just because it might not be an issue at the state level doesn’t mean that the IRS isn’t watching.
Federal gift tax exclusion
At the IRS level, the gift exclusion allows people to give away an amount not to exceed $15,000 each year. This annual gift can be made to any number of people without filing a gift tax return or having those gifts count against the lifetime exemption.
Let’s look at a married couple with four kids. Each spouse can gift away $15,000 to each child. The combined gift amount is $60,000 per spouse or $120,000 for the couple.
Tax Return Issues & Requirements
When a gift is made that exceeds the annual exclusion, the donor must file IRS Form 709 (gift tax return) to report the excess gift.
A few points to note regarding the gift tax return:
- The return is required even though no tax is due because of the lifetime exemption amount.
- The tax return is required by April 15th of the year after the gift is made. This is the same deadline as Form 1040.
- If the 1040 tax return was extended to October 15th, the extended due date applies to the Form 709 tax return.
Married couples cannot file a “joint” gift tax return like they can with a 1040 tax return. Each spouse must file a separate tax return if any taxable gifts are made.
However, many people don’t realize that married couples can “split” their gifts. When a split gift is made, the gift exclusion can be combined between the two spouses for a gift made entirely by one spouse.
Conclusion
Gift tax strategies are an essential part of estate planning. If you are concerned about the Texas gift tax, I think you can breathe a little easier.
But don’t forget about the federal gift exemption. Many don’t realize that they have an estate tax issue until it is too late.
