This holiday season, it’s ideal to know how federal or Arkansas gift tax laws affect consumers. This law does not affect all buyers, gift-givers or recipients. But it’s still necessary to understand the law or risk facing an IRS tax penalty.
Exemptions, exclusions and exceptions
The gift tax is a fee that an individual must pay when providing a gift to someone else. This tax varies from 18% to 40% based on the gift’s size and complexity. There are different techniques that people use to legitimately avoid paying this tax.
One method is to provide a gift of $15,000 or less within one year. Anything more than the annual limit has to be reported to the IRS. Exceeding this limit means that you owe up to 40% tax on the overpaid amount. However, most gifts are less than $15,000 and are not subject to the gift tax.
Violations of gift tax law
Gift tax fraud is one of the least reported violations of tax law. The fraud is committed by failing to report taxes made on large contributions. The penalty is to pay the original tax along with fees and a civil fraud penalty that equals 75% of the underpayment. In some cases, the IRS may order a gift tax audit.
How laws affect your holiday purchases
Estate and gift tax laws are often overlooked when making large financial transactions. During the holiday season, gift tax laws can apply to anyone if they don’t meet the exemptions set by the IRS. Individuals who frequently buy high-cost gifts should review the laws in their states and see if they are exempt.