Gift tax is a tax the government imposes on gifts of money or property made from one person to another. The federal government and many states impose it, but New Jersey is one of the few states that does not impose a gift tax.
Federal gift taxes
Federal gift taxes are triggered if the value of the gifts you provide exceeds a certain amount. The federal gift tax exclusion is $16,000 for 2022 and $17,000 for 2023. That means you can give someone up to $16,000 or $17,000 worth of cash, assets, or property annually without worrying about paying a federal gift tax.
Exclusion from annual gift tax
Even if you exceed the annual gift tax exclusion, it doesn’t mean you will be required to pay a federal gift tax. To trigger an out-of-pocket tax, you would need to breach the lifetime gift and estate tax exemption. That amount is currently $12.06 million for 2022 ($24.12 million for married couples) and $12.92 million for 2023 ($25.84 million for couples).
When to pay the gift tax
If you breach your lifetime exemption, you will owe gift tax. The maximum rate of the federal gift tax is 40%, which applies to the portion above the exemption. So if the exemption is $12.92 million and you gave away $12.4 million, you will only be taxed on the difference of $308,000.
Ways to reduce the gift tax
There are ways you can reduce your potential gift tax liability, such as giving small gifts of up to $15,000 that don’t trigger any taxable event. You can also establish a trust or use other estate planning techniques like allocating your estate to a qualified charitable organization. These methods can help you minimize the taxes you owe while ensuring your assets end up in the right hands.
Additionally, you could consider setting up trusts or giving away money during your lifetime to avoid any gift taxes after you’re gone. Proper planning makes it possible to protect your wealth while still being generous to those you love.
Gift tax is a complicated issue that should be carefully considered to protect your money. Because New Jersey does not impose a gift tax, you should focus on understanding the federal gift tax laws and exemptions to find the best way to give gifts while still having financial security.