In New York and most states, there is no state gift tax. This means that you do not have to pay anything when you give or donate money or property to another person during your lifetime. So, the short answer is no, you do not have to pay for a New York state gift tax for your gifts or donations.
At first glance, this seems simple enough. But if you are planning to gift property and assets as part of your estate planning strategy, there is more to this than meets the eye. Hence, there is a need for you to fully understand the tax implications of your gift transfers to your estate plan.
But first things first, what is a gift tax?
Gift tax defined
A gift tax is a tax imposed on the giver for the transfer of his assets or property to another during his lifetime. A transfer is considered as a gift if the giver receives nothing in return for the property given. The law also considers a transfer as a gift if the giver receives less than the full value of the gifted property.
Even though there is no New York state gift tax, there is a federal gift tax once you exceed your annual and lifetime limits.
Is there a gift tax in New York? No.
As mentioned before, you do not have to pay any gift tax in New York. There is, however, an estate tax that your estate might need to pay when you die. The amount of estate tax will depend on the valuation of your estate upon your death which is arrived at after making the necessary deductions and exclusions. The larger the taxable estate, the higher the tax will be.
This is where gifting may become particularly useful as an estate planning tool. Since there is no gift tax in New York, you have the option of gifting your assets and properties to your heirs and beneficiaries while you are still alive. This in turn would reduce the value of your taxable estate.
If by your estimate the value of your estate is more than $5,930,000, you might need to start thinking about ways to reduce your taxable estate if you do not want to pay thousands of dollars in estate taxes. You should also be wary of the so-called New York estate “tax cliff” provision wherein a relatively small exceedance from the threshold amount could totally wipe out your entitlement to the tax exclusion benefit.
Gifting your assets could possibly put your estate on a desirable tax level bracket. The fact that there is no state gift tax in New York makes this a very attractive estate planning option.
There is, however, a limit to the viability of gifting as a method to reduce your estate tax liability.
Not every gift you make will reduce your taxable estate. The New York Tax Law provides that gifts made within three years of death will be “clawed back” or included in the valuation of the estate. The rule effectively nullifies any tax benefit obtained from the reduction of a taxable estate through gifting if such gifts or donations are made within three years of the death of the decedent.
This makes the timing of the gift very crucial for estate planning purposes. Thus, to ensure that gifting will be able to help reduce your estate taxes, it should generally be made as early as possible to decrease the chances of it being nullified due to your untimely death. Needless to say, consulting with an estate planning and tax attorney would be a prudent course of action for this matter.
Federal gift tax
Aside from the “clawback” provisions in the New York Tax Law, there is also the federal gift tax thresholds that you should watch out for. While you need not worry about state gift taxes in New York, federal tax law is a different story.
The Internal Revenue Code imposes a gift tax beyond the annual exclusion limit of $15,000. If you exceed this amount in a year, you will have to file a gift tax return. But as to the gift tax itself, you might not need to pay it immediately as you can still make use of your lifetime exclusion limit which is now as high $11.7 million in 2021 under the 2017 Tax Cuts and Jobs Act. Any gift in excess of your $15,000 annual limit may simply be deducted to your lifetime exclusion limit.
Moreover, it is also important to note that the annual exclusion limit is per recipient. A $15,000 gift to one person and another $15,000 gift to another person will not put you beyond your annual limit. In other words, you will only exceed your annual limit when you give one specific recipient a gift of more than $15,000.
For example, even if you give $15,000 to your brother and another $15,000 to your father, you are still well within your annual exclusion limit. You will not be required to file a federal gift tax return for these gifts. But if in addition to these gifts, you also give $16,000 to your mother, you will be considered to have exceeded the annual limit and you will have to file a gift tax return for the $16,000 gift. But as mentioned before, you probably don’t have to pay any gift taxes since the excess $1,000 can be covered by your lifetime exclusion limit.
Unified gift and estate tax credit
One last thing that you should be aware of about federal gift taxes is on the nature of your lifetime exclusion credit. Your $11.7 million lifetime exclusion limit is a “unified tax credit”which applies to both gift and estate taxes.
This means that any gifts in excess of the annual limit that is deducted to your lifetime exclusion limit will result in lesser protection for your estate against federal estate taxes. To illustrate, if you use $2 million of your lifetime exclusion benefit to avoid paying gift taxes for certain gifts, you will only have $9.7 million left to shield your estate from federal taxes when you die.
If you think that your estate would be worth a lot upon your death, you should carefully consider whether it would be more advantageous for you to use your unified tax credit to shelter your estate from estate taxes instead of using it as a shield against gift taxes.
Gifting as an estate planning strategy
Gifting is a useful estate planning tool that could help save you thousands of dollars in taxes. But as you might observe in all the discussions above, it is a highly complicated and technical matter wherein a lot of factors and circumstances needs to be fully taken into account.
This is where a New York estate planning attorney who is knowledgeable in both state and federal tax law will prove to be truly indispensable. If you wish to learn more about how you can utilize gifting as part of your estate planning strategy, you can call the Law Offices of Albert Goodwin at (212) 233-1233.