Because Colorado has no state gift tax, residents are free to give third parties just about anything. But even though you are free to make gifts, that doesn’t mean you won’t have to pay taxes on the back end – because, depending on the amount, the federal gift tax may apply.
The IRS defines the federal gift tax as a “tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.” Importantly, the tax applies “whether the donor intends the transfer to be a gift or not.”
In essence, the federal gift tax applies to any gift of property or money (above the specified threshold discussed below) made while the donor is living.
Is there anything excluded from the IRS’s definition of “gift?”
According to the IRS, the general rule is that any gift is taxable, subject to the following exceptions:
- Gifts that are not more than the annual exclusion for the calendar year
- Tuition or medical expenses you pay for someone (i.e., educational and medical exclusions)
- Gifts to qualifying charitable organizations (which are deductible from the value of the gift(s) made)
- Gifts to your spouse; and
- Gifts to political organizations
There are two important monetary thresholds to keep in mind.
The first is the annual exclusion of $15,000 for 2018 (up from $14,000 in 2017) and the second is the $5.6 million ($11.2 million for married couples) lifetime exclusion. Generally speaking, if you remain below those, you will not have to pay a federal gift tax.
If you have questions regarding your specific situation on how to comply with the IRS’s complex gift tax scheme, it is best to contact a tax professional to assist you.
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Lauren Lester is an affordable family law, estate planning, and probate lawyer licensed in Colorado.