Optimize your tax returns and avoid the gift tax

On Behalf of | Feb 24, 2021 | estate tax

North Carolina residents who work hard to ensure they have a comfortable retirement are often surprised about how much taxes can cut into their funds. While virtually everyone can benefit from tax planning, it is essential if you have a significant estate.

According to Kiplinger, tax planning focuses on reducing your taxable income legitimately. It lets you save (or spend) more of your money while minimizing your annual tax bill.

Giving large gifts

You may choose to optimize your tax return by gifting a portion of your estate. The government prevents large wealth transfers by imposing a gift tax. Routine property and monetary gifts remain unaffected. For the years 2020 and 2021, the annual gift limit is $15,000 per giver and recipient. Understanding what counts as a gift according to the IRS can help you avoid getting hit with an unexpected tax bill.

For example, if you sell a house far below fair market value, the IRS considers the difference between the house’s value and your price a gift. If that difference exceeds $15,000, you may get hit with the gift tax. However, there are several exempt gifts, such as the following:

  • To political organizations
  • To a spouse who is also a U.S. citizen
  • As payment for medical treatment and related care
  • As payment for education expenses

Avoiding the gift tax

If you gift extensively, you can take steps that avoid the tax. Couples can give up to $30,000 to a recipient, $15,000 each, without passing the annual exemption. Exceeding the lifetime limit can also trigger the gift tax. You can factor that into your estate plan and utilize alternatives that allow you to avoid the tax. Working out the logistics is complex if you have large or involved financial holdings. Acting now can help you protect your wealth and direct it where you wish, while legitimately reducing your tax bill.