Let’s examine what a gift tax is and the situations in which it is applied. Also, in short, Illinois does not have a gift tax; however, there are federal ramifications that can impact your Illinois and overall tax bill. This article will discuss other aspects, including annual limits on exclusions, lifetime exclusions for gift and estate taxes, and other federal and state aspects of a gift tax.
As the name implies, a gift tax is a federal tax placed on gifts in certain circumstances. The giver is the party responsible for paying the tax, not the recipient. The gift tax is only imposed when the gift amount exceeds the federal annual exclusion amount, and the gifter has used up their lifetime exclusion. The federal annual exclusion amount refers to an amount dictated by the federal government on the amount an individual can gift to others without impacting their lifetime exclusion amount.
The current amount for the annual exclusion is $15,000, so you could give up to $15,000 worth of gifts to any number of people per year, and you will not be subjected to a gift tax, and your lifetime exclusion won’t be impacted. Married people can utilize each other’s annual exclusions; in essence, a married couple will have a $30,000 joint limit regardless of who gives the gifts.
The gift must be a present interest gift to be subject to the exclusions mentioned above. A present interest gift is one in which there are no future contingencies or any requirement of time that must pass before the gift is received, giving the recipient immediate complete control of the gift. Giving to irrevocable trusts may not qualify for the exclusion for this reason if there are limitations in place for the beneficiary’s current access to the assets gifted.
As of 2019, the federal lifetime exclusion amount is $11.4 million, with slight increases added each year. For the state of Illinois, the lifetime estate tax limit is $4 million. So every dollar over $15,000 that you gift in a year will be subtracted from these lifetime limits, both Illinois state and federal. Once this lifetime gift and estate tax exclusion has been met, you must pay annual taxes on every penny above $15,000. To be clear, until you exceed $11.4 million federal and $4 million state (estate only) in cumulative annual excesses of $15,000, you will not pay gift or estate tax.
For estate tax purposes, the lifetime exclusion limit is arguably even more pertinent. Upon your passing, the estate becomes responsible for estate taxes on assets you owned that exceed the remaining lifetime exclusion limit. As stated above, the gift and estate tax exclusions are combined. This is done to prevent individuals from merely gifting all of their assets when their death is near in order to circumvent paying estate taxes. By combining them, people cannot give everything away and avoid estate tax, as it would be paid in the form of a gift tax.
To illustrate how this works exactly, let’s assume you have gifted over $2 million in gifts over and above the $15,000 annual exclusion. This $2 million will now be subtracted from your lifetime Illinois limit of $4 million, leaving $2 million remaining in your lifetime exception amount. If you have $3 million left in assets at the time of your passing, $2 million would be exempt, and your estate would be responsible for estate taxes on the remaining $1 million. If you had not given any gifts during any year of your life over $15,000, then the entirety of your remaining $3 million in assets would not be subject to estate tax.
As mentioned in the introductory paragraph, Illinois does not have a gift tax. However, any amounts that are gifted above and beyond the federal annual gift tax exclusion will reduce your Illinois estate tax lifetime exemption limit. Even though the gift tax would never apply at the state level in Illinois, everything you gift over the federal annual exemption limit will eventually count against the $4 million lifetime estate tax exclusion.
In the above example, if you have gifted $2 million cumulatively over the $15,000 annual exemption limit, while no gift tax would have been imposed, your estate would still be responsible for the estate tax on that $1 million. You take the $4 million lifetime exemption minus the $2 million lifetime gifting, leaving you with $2 million left in exclusion. Your $3 million estate less the $2 million remaining exemption means $1 million is subjected to the estate tax.
If the trust in question is a revocable trust, then no, that is not gift taxable. A transfer to an irrevocable trust COULD be subject to a gift tax depending on the establishment of the trust. That is a lengthy conversation, but it is essential to be aware that some irrevocable trusts would be subject to a gift tax, and some will not be.
In general, if your gift exceeds the aforementioned annual exclusion or you intend to utilize your spouse’s annual exclusion, those would be subject to a gift tax. There are certain types of charitable gifts that are subject to the gift tax as well. While the general rule is that charitable donations are not subject to the gift tax regardless of the gift, certain circumstances require a gift tax return, even though no tax will be paid.
If your gift was a partial interest in real property to the charitable institution or if you’re required to file a gift tax return on other, non-charitable, gifts then all charitable gifts must also be listed on the return. Other particular and complicated scenarios would also require a gift tax, even for a charitable gift, but again, that would only be in very technical situations.
It’s in your best interest to consult with an expert if you’re unsure about whether or not your gift is subject to any sort of taxes. The team at Pasquesi Sheppard would be happy to answer any of your questions regarding tax preparation, financial planning, or bookkeeping. Reach out to a team member at 847-234-5000 or via our convenient and secure online messaging system today.