Title kinda says it all.
Let’s say I won a lottery for $10 million (example, I have not).
My understanding is the government will not hand me a check for $10 million. They will withhold taxes and give me what is left over. Fine.
I want to share my bounty and give my best friend $1 million. Will the government then tax them on that $1 million which was already taxed?
The government taxes people, not money.
Nope. Gift taxes (and estate taxes) don’t kick in until you reach a much higher lifetime number (assuming everyone is a US citizen). You do have to report it if you give that much in a year.
https://www.hrblock.com/tax-center/income/other-income/do-i-have-to-pay-taxes-on-a-gift/
As above. One of the ideas being it was not considered a good thing to leave the loophole of billionaires “gifting” their entire estates to the kids without tax consequences. But gifting lesser amounts shouldn’t be penalized.
They will tax you on that amount, unless you use part of your life-time grant gift tax exclusion as noted above. The donor pays gift tax, not the receiver of the gift - so gifting $1 million will cost you considerably more than $1 million unless you exempt it.
All good info so far.
As a general matter, recipients of gifts never pay income taxes on them. Provided it’s a genuine gift, not a payment for goods or services disguised as a gift.
Right now the lifetime gift tax exemption which also equals the estate exemption is ~14M.
So the OP’s 10M, which is probably about 6M after he pays income taxes on all of it, is well under the 14M exclusion. He could gift all of it to a single person or split up across hundreds of people and still neither he no they would owe any gift taxes. He’d need to report those gifts on his tax return, but they would not affect his own taxes. The recipients are never taxed and need report nothing.
Once lifetime gifts exceed the 14M, any further gifts would still be reported each year, but now they’d trigger the gift tax.
When the OP dies, that portion of lifetime gifts + his remaining estate that exceed the 14M limit would be subject to estate tax.
This is why rich people do not simply leave their money around to be taxed when they die. Various trust arrangements can be set up so they can effectively gift far more than that to their family, and effectively leave far more than that to their family, all without paying any gift or estate taxes. And you don’t get and stay real rich by giving money to anyone not in your bloodline. Greed is good. Or at least profitable.
Had our OP won a $100M lottery, or if he invests most of his smaller $6M winning wisely rather than gifting away most of his seed corn immediately, this $14M limit may well be part of his future.
And there are even ways to raise the exemption. The OP could leave 14 million and their spouse could leave another 14 million (assuming he grows his windfall sufficiently). I’m pretty sure that they can then give another 14 million each to their child’s spouse. There are lots of ways to pass on pretty substantial amounts of money without hitting the limit.
There’s this weird idea floating around that money should only ever be taxed once. But if that were so, when? When the money is created? That’s nonsensical.
What actually gets taxed is not money, but transactions. If I run a business, there’s tax paid when my business earns money. Then I pay my employees, and there’s another round of tax. Then the employees go out and spend their money, and that spending is taxed. Then whoever sold them things has money, and they do more things with it, and those get taxed, and so on.
No, I don’t think so. I believe it is $14 million (actually $13.99 million for some arcane reason) a piece lifetime, period. So you can’t hand the daughter ~$28 million tax free from the two parents, then turn around a give another ~$28 million to the spouse without paying a shit ton of taxes on that second half.
That doesn’t answer the question.
OP asked about taxes on a gift transaction. The gift in question would not be taxed.
How the recipient spends that windfall may be subject to taxation.
How does that change if I’m Canadian living in Canada, win the Candian lottery on which there is no tax, and give my American niece or nephew a large gift?
No tax for the recipient. No US tax for the giver. I have no idea what the Canadian tax issues might be.
Kind of like paying taxes on a used book that was taxed when it was sold in the first place?
There are two different issues. The first is the annual gift tax exclusion, which allows me to give anyone $19K in a year without a gift tax return needing to be filed. I can give my daughter $19K and so can my husband and we can each give the son-in-law the same amout, so that every year, we can give them a total of $76,000 ( and we could give the same amount to their 2 kids.
If we give them more than that - for example, I give my daughter $30K this year- I have to file a gift tax return and report the additional $11K. I don’t pay tax on it then, however. That gift tax return is to keep track of the gifts over the annual exclusion because in addition to the annual limit, there is also a lifetime exemption of $13.99 million ( currently) for all recipients total, not per recipient. . The $11K gets subtracted, and leaves me with a lifetime exemption of $13,979,000. There will not be any taxes until I have given away more than $13.99 million in gifts over the annual exclusion, whether during my life or as part of my estate. There are some gifts that are never subject to gft tax, such as gifts to a US citizen spouse.
IIRC, that’s not exactly it.
Back in the Tea Party (“TP”) days one of the RW talking points was “No double taxation!”. Which the propagandists e.g. Limbaugh harped on about endlessly and many many of the TP faithful began to dutifully repeat the mantra with glazed eyes and no comprehension.
The real meaning the RW leadership meant was that dividends paid to shareholders should not be treated as taxable income to the shareholders. At all. 100% tax-exempt. And only dividends should get this treatment. After all, their BS rationale went, dividends must be paid from a business’s profits, and those profits have already been taxed. So paying that dividend money on from company to shareholder should not be taxed. The money should not be taxed twice.
It was a naked tax cut for the wealthy because it’s the fatcat big shareholding classes and old money that derive most of their income from share dividends. The working class t-shirt wearing TP flagwavers were actively slavering to grant huge tax cuts to the wealthy that they in turn would be asked to make up the revenue for. This would also be a giant boon for small-medium businesses where they could arrange to have all their profit of the year paid to the owner(s) as untaxed dividends rather than as taxable salary. The only people left paying income taxes would be labor.
I think it was about at this point that the lightbulbs went on in the RW propaganda/exploitation-o-sphere that they can sell the rubes anything with a catchy slogan and slickly entertaining presenters with no dissenting voices to be heard.
MAGA all the way to the late unlamented Charlie King was the logical continuation of this realization.
Actually, I see it as pretty simple. In general, it is income that is taxed.
Your business makes income (profit) - it’s taxed. The business pays you wages, or dividends, or owner withdrawal - that’s taxed. (IIRC in Canada, and I assume the USA, there is a lower tax rate on dividend income to balance the fact that the business has already paid a profit tax).
You buy a car from the dealer - the dealer company collects a tax on his income from the sale, on behalf of the state. Sales tax is a tax on the income of the seller. In fact, in actual VAT (Candian GST) like civilized countries have to help pay for things like universal healthcare and low cost post-secondary education - the “income” part is explicit. And in many countries, the VAT is wrapped up in the price. The business collecting the VAT deducts the VAT they paid on those goods wholesale - all the way down the chain - so it is in fact a tax on the markup - i.e. income. (And then they pay a tax on profits too, so businesses get double-shafted).
A tariff, although paid by the importer, is a way to collect tax from the implied profit the foreign manufacturer makes. (and note for countries with VAT, the exporter does not have to collect VAT for the home country when exporting, so the sale price is “without VAT” - which may be what confuses the current US administration, which does not have a national sales tax on imports. )
Capital gains, similarly, is a tax on income for selling something at a profit. However, it sticks it to those who have suffered from inflation since they first bought.
You make a donation to an official charity or government organization, you are foregoing income so logically you ge a break on taxes.
It seems the USA unlike Canada, considers gifts to be income and wants to tax someone on them. I assume that, based on the size of the applicable deductions, they consider that a tax on something over $14M is not onerous to people who have $14M to give. Plus, it avoids the issue of “is it a gift or income?”.
…and then there are property taxes, license fees, and other such taxes that don’t fit into this category.
Not exactly - if that was the case, then the recipients would be paying income tax. But what actually happens is the gift-giver’s estate ends up being taxed. Which is not actually all that different than what happens in some other countries. For example, if I’m understanding correctly, in Canada assets are deemed to have been sold upon death and taxes are assessed on the capital gain which is included on the deceased’s final tax return. So if the asset was purchased for $250K and was worth $500K on the date of death, some portion of that $250K gain would be taxed on the deceased’s final income tax return. ( It’s possible that primary residences are treated differently, so for this example, the asset is not a primary residence). At far as I can tell, this is true regardless of the size of the estate.
Not so in the US - if I buy a house for $250 K and it’s worth $500K when I leave it to my son , that $250K gain will not be taxed unless my lifetime gifts/estate exceed approximately $14M. However, my son’s basis will be the $500K * it was worth when he inherited, so no taxes will ever be paid on that original $250K gain. Same goes for stocks or any other assets - any gains between purchase and the date of death will escape taxation. If I leave my kids assets with a total value of $12 million that cost me $6 million, that $6 million gain will never be taxed.
*Gifts made during life don’t get the step-up and keep the original basis
I think you’re right. I’m pretty sure that the annual exclusion would let you quadruple the amount via my method (which is why I assumed it carried over to lifetime), but I think you’re right that the lifetime amount is “per donor”, so the limit would be 27.98 million (13.99 per donor) total from the parents.
Yeah. The lifetime limits are per donor, and who the recipient is doesn’t matter at all. Your offspring, extended family, or a random name from the phone book are all the same as to recipients.
Note that random names from the phone book may actually be dead themselves. Or find someplace that still publishes current ones.