Despite paying taxes your entire life, even when you die, the government still wants something from you! As a financially savvy individual, it behooves you to understand as much about the tax rules as possible. After all, tax is likely your largest ongoing expense.
The Internal Revenue Code imposes a gift tax on property or cash you give to any one person, but only if the value of the gift exceeds a certain threshold called the annual gift tax exclusion. For 2020, that annual gift tax exclusion amount is $15,000.
That’s right, you’re not allowed to give more than the annual gift tax exclusion without incurring a tax. This is despite having already paid taxes on the $15,000!
For example, let’s say you earn $200,000 a year and pay a 20% effective tax rate. Your take home pay is $160,000 and you save 20% a year, or $32,000 a year.
If you wanted to give 100% of your hard-earned savings to someone, you may have to eventually pay an additional tax on $32,000 – $15,000 = $17,000 if your estate ends up over the estate tax exemption amount. Thankfully, the estate tax exemption amount is $11,580,000 per person.