Imagine celebrating a significant milestone — perhaps your child’s graduation or a recent wedding — and you decide to gift them a significant sum to jumpstart their future. While the intention is purely out of love, did you know this generous act could have tax implications?
What is the gift tax and why does it exist?
The gift tax is a federal tax on the transfer of property or money while receiving nothing, or less than full value, in return. Its purpose is to prevent individuals from avoiding the estate tax by giving away their wealth before death. It also ensures that even these transfers contribute their fair share to public funding.
What is Florida’s stance on gift taxes?
It is important for Florida residents and those with connections to the state to understand that Florida does not impose its own state gift tax. However, federal gift tax regulations still apply, making it essential to be aware of these rules to avoid unexpected tax liabilities.
What about at the federal level?
Unlike the state of Florida, there are many situations where the Internal Revenue Service (IRS) will expect a cut of that gift to the recent graduate or newlywed. Navigating federal gift tax exemptions can be complex, but understanding these can benefit your financial planning:
- Annual exclusion limit: For 2025, you can give up to $19,000 to any number of people each year without incurring gift taxes. If you are married, your spouse can also gift $19,000, allowing a combined $38,000 per recipient per year.
- Lifetime gift and estate tax exemption: In addition to annual exclusions, there is a substantial lifetime exemption amount that also covers estate taxes. For 2025, this exemption is set at about $13.99 million per individual. This means you can give away this amount over your lifetime without paying federal gift or estate taxes.
Understanding these exemptions helps you to structure how and when to distribute assets and can help to better ensure a tax-efficient transfer of wealth to the next generations. When this information is used wisely, you can reduce your taxable estate and potential estate taxes upon death.
These rules are not easy to navigate. As such, it is often wise to seek legal counsel experienced in estate planning. Legal counsel can provide detailed information as it applies to your estate and updates on tax laws while helping to structure gifts to maximize tax exemptions and minimize tax liabilities.