Even though gifts are not subject to US income tax, they may be subject to US GIFT tax. Below the 6 gifts that you can make free of US gift tax!
General rules about US gift tax :
• A gift is a transfer where the donor does not expect to receive something in return of equal value
• US gift tax applies to US citizens, US residents and individuals who own US property
• The DONOR is subject to and is the one paying the gift tax.
• A US person is subject to gift tax on his/her worldwide assets. A foreign person is subject to gift tax on his/her US asset (such as US real estate or tangible items located in the US).
• For taxable gift, the gift tax ranges from 18% to 40%. In addition, gifts between US and foreign persons may be subject to FIRPTA tax.
To know more about other US tax rates: https://kbfinancials.biz/tax-rates/
1/ Gift below the lifetime exclusion
A US person can give up to $12,060,000 during his/her lifetime without paying US gift tax. A foreign person can give up to $60,000 during his/her lifetime without paying US gift tax. This lifetime exclusion is cumulative and includes all property transferred by gift and by death. As a note, some tax treaties give their nationals the full US deduction in the proportion of their US assets to their worldwide assets.
2/ Gift below the annual exclusion
A US or a foreign person can give up to $16,000 to another person (US or foreign) without paying US gift tax. The person receiving does not need to be related to the person giving. There is no limit on the number of recipients of a $16,000 gift.
3/ Gift between spouses
A US person can give an unlimited amount to his/her US spouse (Marital deduction) without paying US gift tax. A US person can give up to $164,000 to a foreign spouse. As a note, some tax treaties give their nationals the full US deduction in the proportion of their US assets to their worldwide assets.
4/ Gift for tuition expenses
A US person can give an unlimited amount for tuition expenses to another person (US or foreign) without paying US gift tax. The gift must be made directly to the educational institution (US or foreign). The educational institution must have a regular enrolled body of students. The person receiving does not need to be related to the person giving.
5/ Gift for medical expenses
A US person can give an unlimited amount for medical expenses to another person (US or foreign) without paying US gift tax. The gift must be made directly to the medical institution / care provider / medical insurance (US or foreign). Qualified medical expenses include un-reimbursed expenses and expenses that would be deductible on the US income tax return (form 1040). The person receiving does not need to be related to the person giving.
6/ Gift to political or tax-exempt organization
A US person can give an unlimited amount to a political or tax-exempt organization without paying US gift tax. The gift to the political organization must be used for the benefit of the organization and cannot be passed onto anyone else. Tax exempt organizations include civic leagues, horticultural organizations, agricultural organizations and labor organizations. The tax-exempt organization must be tax exempt under US federal law
Important Note: Even if your gift falls under the above exceptions and is tax free, you may need to file a US gift tax return (form 709) to record your gift.
To know more about gift tax return: https://www.irs.gov/forms-pubs/about-form-709
As always, bear in mind the date of this article as tax laws change over time
For assistance with your international tax needs, please contact Karine Bauer, EA, JD – HERE.
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Updated June 11th, 2023