When it comes to transferring wealth, the gift tax exclusion is a valuable tool for individuals looking to pass on assets without incurring significant tax liabilities. The gift tax is a federal tax on the transfer of money or property from one person to another without receiving something of equal value in return. However, the IRS provides an annual gift tax exclusion that allows taxpayers to give away a certain amount each year tax-free. Here’s a closer look at how this exclusion works and how you can use it to your advantage.
What Is the Gift Tax Exclusion?
The gift tax exclusion allows individuals to give gifts up to a certain amount each year without triggering the gift tax. For the tax year 2024, this annual exclusion amount is $18,000 per recipient. This means you can give up to $18,000 to as many people as you like within the year. Those gifts won’t be subject to the federal gift tax. Note that the person who makes the gift, known as the donor, is generally responsible for paying the gift tax.
How Does the Gift Tax Exclusion Work?
Each year, you can give a specific amount to any number of individuals without the gifts counting against your lifetime gift tax exemption. Here’s how it breaks down:
Annual Limit Per Recipient: The exclusion applies on a per-recipient basis. For example, if you have three children, you can give each of them $18,000 in 2024 without owing gift tax. That means you could potentially gift $54,000 ($18,000 x 3) in one year without incurring any tax liability.
Unlimited Gifts: You can give gifts to as many individuals as you wish. The exclusion applies separately to each recipient. This means you can give $18,000 to one person or 100 people in 2024 without paying gift taxes
Joint Gifts for Married Couples: Married couples can combine their exclusions. If you’re married, you and your spouse can each gift $18,000 to the same person. This effectively doubles the exclusion to $36,000.
Lifetime Gift Tax Exemption
In addition to the annual exclusion, there’s a lifetime gift tax exemption. This is tied to the federal estate tax exemption. This is the total amount you can give away over your lifetime without having to pay federal gift taxes. For 2024, this lifetime exemption amount is $13.61 million per individual. If your gifts exceed the annual exclusion amount, the excess is deducted from your lifetime exemption. However, this only comes into play when you exceed the annual limit. Note that in 2026, the lifetime exemption amount will return back to pre–Tax Cuts and Jobs Act levels. This could mean an estimated $7 million in lifetime gift exclusion.
Gift Tax Examples
Here’s an example of how the gift tax works. If you gift $30,000 to a friend in 2024, you’ve exceeded the $18,000 exclusion by $12,000. That $12,000 would count against your lifetime exemption of $13.61 million. After this gift, your remaining exemption would be $13.61 million – $12,000 = $13,598,000. You would not owe gift tax until your cumulative gifts exceed this lifetime amount. However, you must file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, to report this gift.
Let’s look at another example that involved exceeding the lifetime exemption. Let’s say you have already used up your $13.61 million lifetime exemption by giving large gifts over the years. In 2024, you give $1 million to your grandchild. The first $18,000 of this gift is covered by the annual exclusion. However, the excess amount of $982,000 ($1 million – $18,000) is now subject to gift tax, which has a marginal tax rate. In other words, the larger the gift, the more tax you’ll pay.
What Gifts Are Excluded?
Not all gifts count toward the annual exclusion. Certain types of payments are not considered taxable gifts, including:
Direct Payments for Medical or Educational Expenses: If you make a direct payment to a medical provider for someone else’s medical bills or pay tuition directly to an educational institution, these payments do not count toward your annual gift exclusion.
Gifts to Spouses: Gifts to your spouse are generally not subject to gift tax if your spouse is a U.S. citizen.
Charitable Gifts: Gifts made to qualifying charities are typically not subject to gift tax.
Filing a Gift Tax Return
If you give a gift exceeding the annual exclusion amount to any recipient, you’ll need to file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This form tracks gifts made during your lifetime and any amounts that count against your lifetime exemption. However, filing this form doesn’t necessarily mean you owe gift tax; it’s simply a way for the IRS to keep track of the gifts you make.
Why Use the Gift Tax Exclusion?
The gift tax exclusion can be a powerful estate planning tool. By making use of the annual exclusion, you can reduce the size of your taxable estate, potentially lowering future estate taxes. It also allows you to pass on assets to your loved ones during your lifetime in a tax-efficient manner. If ever unsure how to proceed with gifts, you should consult a knowledgeable tax professional. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations.
When dealing with unpaid taxes, one of the most significant and immediate consequences can be an IRS bank levy. This action allows the IRS to legally seize funds directly from your bank account to satisfy outstanding tax debts. Understanding how an IRS bank levy works, how it can be avoided, and the steps to take if you’re facing one is crucial for anyone in financial trouble with the IRS.
How Does an IRS Bank Levy Work?
An IRS bank levy is a legal mechanism the IRS uses to collect unpaid taxes. Unlike a wage garnishment, which takes money from your paycheck over time, a bank levy can seize the full balance in your account up to the amount of tax owed.
IRS Bank Levy Process
IRS Notice: Before placing a bank levy, the IRS must send you a series of notices. The most critical is the Final Notice of Intent to Levy and Notice of Your Right to a Hearing (also known as Letter 1058 or LT11). This notice gives you 30 days to either pay your debt or arrange an alternative.
Bank Hold Period: Once the levy is issued, your bank will place a hold on the levied amount in your account for 21 days. This hold gives you time to resolve the issue before the funds are transferred to the IRS.
Seizure of Funds: If the debt isn’t settled within those 21 days, the bank will release the funds to the IRS. The levy continues until the full amount owed is collected or the levy is lifted.
What Types of Accounts Can Be Levied?
The IRS can levy funds from several types of financial accounts, including:
Checking accounts
Savings accounts
Money market accounts
Investment accounts (with special rules)
However, the levy only applies to funds available at the time the bank processes the levy. Future deposits are not immediately subject to the same levy unless the IRS issues a new one.
Steps to Take If You’re Facing a Bank Levy
If you’ve received a Final Notice of Intent to Levy, don’t ignore it. Acting quickly can help prevent the levy or minimize its effects. Remember, you have the right to request a Collection Due Process hearing within 30 days of receiving the final notice. This can temporarily stop the levy while the IRS reviews your case. Apart from this, the most straightforward way to avoid a levy is to pay the amount owed in full. If you can’t pay the entire debt, consider other options like an Installment Agreement or Offer in Compromise. If a levy would cause you significant financial hardship, you can request that the IRS release the levy. You’ll need to show that the levy prevents you from meeting basic living expenses. Navigating an IRS bank levy can be complex. A tax professional can help you negotiate with the IRS, request a hearing, or explore settlement options.
How to Avoid a Bank Levy in the Future
To avoid facing an IRS bank levy, it’s important to stay on top of your tax obligations and address issues promptly. Here are some tips:
File on Time: Even if you can’t pay your taxes, file your return on time. The IRS is more likely to work with you if you file, even if you owe.
Communicate with the IRS: If you receive notices about unpaid taxes, respond promptly. You may be able to set up a payment plan or find other solutions before enforcement actions like a bank levy are taken.
Stay Current: If you’re already on an installment plan or settlement agreement, make sure you stay current with your payments. Falling behind on these arrangements can trigger a levy.
Tax Help for Those Being Levied by the IRS
An IRS bank levy can be a serious financial disruption, but it’s not inevitable if you act early. Understanding the process and knowing your options can help you prevent or address a levy before it causes long-term damage. If you’re facing a levy, consider seeking professional assistance to navigate the process and explore potential relief options. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
The national tax firm was recognized for outstanding customer service, transparency, and industry leadership
Optima Tax Relief is proud to announce that it has been named to the 2024 Forbes Advisor ‘Best Of’ list for Tax Relief Services. This prestigious recognition highlights Optima’s unwavering commitment to providing exceptional tax relief services to individuals and businesses facing IRS challenges.
Forbes Advisor’s selection process for this accolade was thorough and rigorous. The methodology included an analysis of 11 high-profile tax relief companies. Forbes narrowed the list down to three top contenders by evaluating several key factors:
Product and Process: The effectiveness and efficiency of each company’s tax relief offerings.
Transparency: The clarity and honesty with which companies communicate with their customers.
Customer Service Satisfaction: Evaluated through third-party tools, this factor measured how well each company serves its clients.
Customer Service Tools: The availability and quality of resources provided to customers for support.
Longevity: How long each company has been in business, reflecting stability and experience.
Optima Tax Relief emerged as one of the top three tax relief companies, and the #1 pick for back taxes relief, distinguishing itself in each of these critical areas. Optima’s outstanding TrustPilot rating, with over 3,400 glowing reviews, was a defining element in Forbes’ decision-making process.
“We are honored to be recognized by Forbes Advisor as one of the best in the industry,” said David King, CEO of Optima Tax Relief. “This award is further proof of the dedication and hard work of our team, who strive every day to provide the highest level of service to our clients. It is especially gratifying to know that our positive client reviews played a significant role in Forbes’ decision—it truly stands as the pinnacle of our efforts. Our mission has always been to help people take control of their tax situations, and this recognition reinforces our commitment to that goal.”
As Optima Tax Relief continues to lead the industry in customer satisfaction and service excellence, this recognition by Forbes Advisor further solidifies its reputation as a trusted partner in navigating complex tax issues.
The IRS can seize your assets if you owe back taxes and fail to resolve your tax debt. This includes bank accounts, wages, and even physical property like cars or homes. Optima Tax Relief CEO, David King, and Lead Tax Attorney, Philip Hwang, provide helpful insight on how you can resolve your tax burden and get back on track with the IRS.
As the third quarter of 2024 comes to a close, taxpayers must remember a crucial deadline: Q3 estimated taxes are due. Whether you’re self-employed, an investor, or someone with substantial income not subject to withholding, making timely estimated tax payments is essential to avoid penalties and stay on the good side of the IRS. Here’s what you need to know to ensure you’re prepared for Q3 estimated tax payments.
What Are Estimated Taxes?
Estimated taxes are periodic advance payments made on income that is not subject to regular withholding. This includes income from self-employment, interest, dividends, rent, alimony, and gains from the sale of assets. If you expect to owe at least $1,000 in tax for the year after subtracting your withholding and refundable credits, you likely need to make estimated tax payments.
Estimated taxes function as a way for taxpayers to pay taxes on income that isn’t subject to automatic withholding, such as a traditional salary where taxes are deducted from each paycheck. The IRS requires these payments to ensure that taxes are collected throughout the year, rather than waiting until the annual tax filing deadline. This system helps both taxpayers and the IRS manage cash flow more effectively.
Who Needs to Pay Estimated Taxes?
Generally, you need to pay estimated taxes if:
You are self-employed, either full-time or part-time.
You have significant income from investments.
You earn income from rental properties.
You have a combination of income sources where not enough tax is withheld.
Self-employed individuals, freelancers, and independent contractors often have to pay estimated taxes because they do not have an employer withholding taxes from their paychecks. Similarly, if you receive substantial income from dividends, interest, rental income, or other sources not subject to withholding, you may need to make these payments. Additionally, retirees and others receiving distributions from IRAs or other retirement accounts might need to consider estimated taxes if these distributions do not have sufficient tax withheld.
Key Deadlines for 2024
The IRS has set four due dates for estimated tax payments in 2024:
Q1: April 15, 2024
Q2: June 17, 2024
Q3: September 16, 2024
Q4: January 15, 2025
It’s important to note that while the IRS provides these general deadlines, specific circumstances might warrant adjustments, such as holiday schedules or weekends pushing the due date to the next business day. Since the typical deadline for Q3 would be September 15th, which falls on a weekend this year, the deadline moves to the next business day, September 16th. These deadlines are crucial, as missing them can result in penalties and interest.
How to Calculate Your Estimated Taxes
To calculate your estimated taxes, use IRS Form 1040-ES, which provides worksheets and instructions to guide you through the process. Here’s a simplified approach:
Estimate Your Total Income: Consider all sources of income expected for the year.
Subtract Deductions and Exemptions: Account for standard or itemized deductions and personal exemptions.
Determine Taxable Income: Subtract deductions from your total income to get your taxable income.
Calculate Tax: Apply the appropriate tax rates to your taxable income.
Subtract Credits and Withholding: Deduct any tax credits and tax already withheld.
Divide the Remaining Tax: Split this amount by four to get your quarterly estimated tax payment.
How to Make Your Payment
The IRS offers multiple payment options to accommodate different preferences and ensure timely payments. Online payments through IRS Direct Pay and EFTPS are generally the fastest and most secure. They allow you to pay directly from your bank account or by using a credit or debit card. Mailing a check or money order, along with a Form 1040-ES voucher is another option. However, it’s slower and subject to potential postal delays. For those who prefer hands-off management, many tax professionals provide services to make estimated tax payments on your behalf. This can help ensure accuracy and timeliness.
Penalties for Underpayment
Underpayment penalties can add a significant financial burden, making it crucial to pay the correct amount of estimated taxes. The IRS provides safe harbor rules to help taxpayers avoid these penalties. If you pay at least 90% of your current year’s tax liability or 100% of the previous year’s liability (110% if your adjusted gross income is over $150,000), you generally will not face penalties. These thresholds are designed to provide flexibility and protect taxpayers from penalties due to minor underpayments.
Tax Help for Those Who Make Quarterly Estimated Tax Payments
With the Q3 2024 estimated tax payment deadline approaching on September 16th, now is the time to ensure you’re prepared. Understanding your tax obligations, accurately estimating your payments, and using the appropriate payment methods can help you stay on track. Proactive management and professional advice can help keep your financial affairs in order. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.
