New Jersey Gifting Explained
While the State of New Jersey does not levy an Estate and Gift Tax, lifetime gifts of significant value do have IRS reporting requirements that givers should note. Note that the tax treatment of gifts is often confusing and can affect the giver’s tax liability. A donee or recipient of the gift does not pay income tax on the money received.
First, the IRS requires that gifts to individuals that exceeded $15,000 per year must be reported on the giver’s gift tax return, known as a Form 709. Gifts may consist of cash, securities and bonds, real estate, jewelry, or other assets.
By requiring donors to report all gifts that exceed $15,000, the IRS maintains a running total of all the donor’s gifts until the sum reaches a federally-mandated lifetime exclusion threshold. Taxes will be due for all gifts exceeding the specified level. The federal tax rate for gifts beyond the Lifetime Gift Exclusion will fall between 18% and 40%, depending on the donor’s taxable income during the reporting year.
The purpose of the regulation is to deter high-net-worth individuals from avoiding estate taxes by giving away all their assets before they die.
Thus, the taxes are paid by the donor, not the recipient.
What are the Current Lifetime Gift Exclusions?
In December 2017, the U.S. Congress passed the Tax Cuts and Jobs Act that increased the lifetime tax exclusion that individuals may give away before paying taxes on their gifts.
The current law states that no taxes are owed on gifts until an individual’s accumulated gifts exceed certain limits. Reporting each gift over $15,000/year provides the IRS the information needed to determine when givers are approaching their lifetime limit.
In 2020, the lifetime gift and exclusion limits will be:
- Individuals: $11.58 million
- Married Couples: $23.16 million
Above these thresholds, all future gifts will be taxed.
The current law will expire at the end of 2025. Without new legislation, the lifetime gift tax exclusion will reduce to about $5 million per person.
Selling Assets Under Their Market Value
If you decide to sell real estate or any other asset to one of your offspring at a price that is substantially lower than the market value, the difference, according to the IRS, constitutes a gift.
So, if you should sell your daughter a $500,000 property for only $300,000, you have given her a $200,000 “gift.” In this instance, that amount must be reported on a gift tax return and applies to your lifetime gift exclusion. If you have already reached your lifetime threshold of gift-giving, you will owe taxes on the $200,000.
During 2020, assisted by proper planning with a reputable New Jersey estate lawyer, parents can transfer up to $23.16 million in assets to their children tax-free.
Gifts that are Exempt from tax liability are those that you give to:
- Spouses who are U.S. Citizens
- Educational Institutions for an individual’s tuition
- Medical facilities for individual care
If a spouse is not a U.S. citizen, the gift tax annual exclusion is $157,000.
Consult an Experienced Estate Lawyer
Giving gifts of value while limiting your tax liability can be a complicated matter. You should have a clear strategy to maximize your gifts and inheritances.
Before making any substantial gifts of assets and while planning your estate, arrange to meet with an experienced estate planning attorney who understands the complexities of the tax laws.
In New Jersey, contact the Law Office of Nicholas A. Giuditta III for a consultation to discuss your estate planning. With over three decades of legal experience, Mr. Giuditta can help you develop strategies to manage financial gifts in the most tax-efficient manner.
To arrange a consultation and learn more about the firm, visit the website of the Westfield, NJ, Law Office of Nicholas A. Giuditta.
Or, phone for an appointment at (908)-232-0099.