19 Oct Does N. J. tax gifts or are they tax-exempt?

Q. Does N. J. tax gifts or are they tax-exempt?
— Taxpayer

A. There are a few items to understand when it comes to gifts and taxes.

Gifting relates to the federal gift tax, not the federal income tax, said Tom Szieber, a trusts and estates attorney at Chiesa Shahinian & Giantomasi in West Orange.

He said New Jersey does not have a state-level gift tax.

“As you alluded to, at the federal level, there is a $16,000 annual exclusion for gifts to any particular donee, meaning that you can gift up to that amount to an unlimited number of individuals,” he said. “If a married couple engages in `gift-splitting,’ the couple may give up to $32,000 — regardless of whether the value of each spouse’s portion of the gift is equal — to any particular donee in any one year.”

Gifts will only qualify for the $16,000 annual exclusion if the gift is of a “present” interest, Szieber said.

“Gifts in trust which the trust beneficiary does not have the immediate right to possess generally do not qualify,” he said. “However, a few types of trusts, including Section 2503(c) trusts for minor beneficiaries do qualify for the exclusion.”

It is also possible to give the beneficiary of a trust a withdrawal power over gifts made to the trust in order to make the beneficiary’s interest in the trust a “present” interest, which qualifies for the annual exclusion, Szieber said.

Donors may also pay unlimited medical and/or tuition expenses for the benefit of another person without it being a gift at all or incurring any gift tax liability, as long as the payment is made directly from the donor to the medical provider or educational institution, he said.

Gifts exceeding the annual exclusion amount must be reported on a federal gift tax return (IRS Form 706) to be filed by April 15 of the year after the year of the gift, he said.

“Gifts in excess of the annual exclusion will reduce the donor’s lifetime unified gift/estate tax exemption — $12.,060 million in 2022 — by the amount in excess of said exclusion,” he said. “If a donor makes large gifts and uses up his or her entire lifetime exemption, he or she will then be required to pay gift tax on further gifts which exceed the annual exclusion.”

The federal gift tax rate is between 18% and 40%, depending on the total amount of taxable gifts given, he said.

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This story was originally published on Oct. 19, 2022.

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