If the Tax Cuts and Jobs Act of 2017 taught everyday Americans one thing, it’s that politicians have vastly different ideas about fair and equitable taxation. Each state has its own standards about how much to tax people on income, real estate, personal property, retail sales and even automobiles in some places.
With tax reform in full effect, it’s important for residents to understand changes to gift taxation at the state and federal levels. By implementing thoughtful gifting to loved ones, you may be able to minimize unnecessary tax liability in your estate planning portfolio.
What is a Gift Tax?
In the eyes of the IRS, a gift is “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.” Basically, any time you write a hefty check or give away a significant asset such as an automobile to someone other than a dependent child or spouse, that constitutes a gift.
A gift can be in the form of cash, checks, real estate, interest-free loans, stocks or other valuables. Another caveat about gifting may include selling an item to a non-dependent below fair market value.
In other words, you cannot sell someone an expensive car for $1 and avoid counting the fair market value toward your gift threshold exemption. The IRS and certain states set limits about how much you can gift without suffering a tax penalty. Once you cross that threshold, the person making the gift will be responsible for paying the tax on the overage. Only under certain, limited circumstances can the recipient be held responsible for paying the tax.
For practical purposes, there are two numbers to remember about gifting. First, there is an annual tax exclusion limit. Second, there is a lifetime limit.
Under the Tax Cuts and Jobs Act, the federal lifetime gift tax exemption stands at $11.18 million. Although not many people reach this threshold, the relatively high limit takes into consideration things like family farms and businesses. Large tracks of land can be both vital to a family’s livelihood and valuable.
The annual estate gift tax for 2018 stands at $5.6 million, an increase from the previous $5.49 million. Couples can shield $15,000 annually, an increase from the previous $14,000 in 2017. Although tax reform is designed to allow everyday Americans to lower their tax liability through gifting, a few states take differing approaches.
How States Address Gift Exemptions
Fortunately for Florida residents, the state does not impose an additional gift tax. It phased out the state-level penalty after with Economic Growth and Tax Relief Reconciliation Act of 2005. That means people who check Florida as their home state in terms of income tax will not be subject to a different or additional standard beyond the federal law.
During the last decade, the elimination of state’s collecting gift taxes has been trending. In 2012, Tennessee repealed its gift tax retroactively to give residents economic relief. North Carolina nixed its in 2009 and Louisiana ended the practice in 2008.
But high tax states such as Connecticut continue to collect monies from gifting. Minnesota also bucked the elimination trend in 2013 by levying a state tax. Given that only two states reportedly participate in the practice of taxing gifts, the practical wisdom would be to avoid making a gift to or from one of them.
For example, if you own a car or boat registered in Connecticut or Minnesota, it may be in your best interest to create lawful standing of the asset in Florida before gifting it. Dealing with these two states may also be a consideration when estate planning. A Connecticut or Minnesota-based trust could suffer unforeseen tax consequences when gifting assets. Connecticut’s gift threshold stands at a relatively low $2.6 million, although it will reportedly increase to $3.6 million in 2019.
The primary thing to keep in mind when making a substantial gift or estate plan in general is that laws differ from state to state and gift exemptions are an excellent example. Imagine, only two states continue to collect this tax.
Contact an Experienced Florida Estate Planning Attorney
If you are considering making a significant financial gift, creating a trust or are interested in reducing your tax liability, the value of an experiences estate planning attorney cannot be understated. The France Law Firm works with everyday people to protect assets and reduce unnecessary taxation. Contact us today to schedule a consultation.