Gift Tax Exclusion 101, Part I

 In General

In honor of North Texas Giving Day (the nation’s single-largest online community-wide giving event!), we thought our readers would find a review of the gift tax exclusion both timely and helpful.  This will be a two part series.  Part I will lay out the basics – the Annual Gift Tax Exclusion’s general rule and the exceptions.  Part II will discuss the implications of excess (or taxable) gifting for the Lifetime Gift Tax Exemption and the Personal Estate Tax Exemption.

First, let’s go ahead and take some items off the tax – table, so to speak.

Here are the types of gifts that have an unlimited gift tax exclusion.

  • CHARITABLE GIVING
    • Gift any amount to a charitable organization (as defined by the IRS), and you’ll be free from any gift tax. So on September 22nd, give tax-free to your heart’s content!
    • If your gift is over $14,000, note that, even though there is an unlimited deduction, the IRS still requires you to file a gift tax return.
  • SPOUSAL GIFTS*
    • The unlimited gift tax exclusion also applies to any gifts made between spouses, with one important exception: a gift made to a *non-citizen spouse will not have an unlimited exclusion, but will instead be capped off at $148,000 (adjusted annually for inflation).
  • GIFTS TO A POLITICAL ORGANIZATION
  • GIFTS OF EDUCATIONAL EXPENSES*
    • This type of gift is for tuition only and must be paid *directly to the educational institution. Other expenses, such as room & board or books, will not qualify.
  • GIFTS OF MEDICAL EXPENSES*
    • Like educational expenses, in order to qualify, all medical expenses must be paid *directly to the medical provider or facility.

If the type of gift you are considering does not fall within one of the aforementioned exceptions, then you’ll need to be sure and understand the limits and requirements of other gifting, which will be governed by:

The General Rule

  • THE ANNUAL GIFT TAX EXCLUSION: GENERAL RULE
    • Every person has a $14,000.00 per year, per recipient gift tax exclusion.
    • How can this play out in practical terms? A married couple can utilize each of their annual exclusions to make a gift, free of tax, of up to $28,000 a year for a single recipient.  Further, that same couple can make a $28,000.00 gift as many times as they want in a given year, so long as the gift is being made to a different recipient each time.
    • This strategy can be used over a period of years to significantly reduce the size of large estates, thereby potentially reducing estate taxes.
  • EXCESS GIFTS & THE LIFETIME GIFT TAX EXEMPTION
    • A gift (or cumulative gifts) that exceeds $14,000.00 to a single recipient in one year will be taxed to the giver. The amount over $14,000 is a “taxable gift”.
    • Now, this won’t be an immediate tax – at least not in the way you’re used to – but we will save that discussion for Part II.
    • Excess gifts, or taxable gifts, must be reported to the IRS. Form 709 is the Gift Tax form, and it is due at the same time as your personal income tax return.  So, a taxable gift made in 2015 will be reported and filed with your return by April 15, 2016.

A Special Note About Gifts to Non-Spousal Family Members:

It may run counter-intuitive for many that there are potential gift tax implications when giving money to a non-spousal family member.  For example, what if you’d like to pay the down payment on your child’s first home as a wedding present.  Or maybe you want to show your support to a family member by providing some start-up capital for the start of a new business adventure – not as an investor or as a loan, but free and clear.  No matter, the same rules and exceptions we’ve been discussing apply in non-spousal family gifting.  But while these limitations and requirements might seem frustrating – some thought, careful planning, and maybe a little patience, can usually lead to a solution which accomplishes your goals without exceeding your gift tax exclusion.

To be clear, there are no short cuts: careful planning does NOT mean selling a car with a fair market value of $25,000 to your son for $5,000.  The IRS will look at such a transaction and find that a $20,000 gift has been made, and therefore a $4000 taxable gift has been made.  However, careful planning may mean that you take advantage of those educational and medical expense exceptions.  Or maybe you decide to spread a gift out over a period of years.   And if you’re making a gift to a 529 plan, you can elect to claim up to five years of your gift tax exclusion in a single year– so a gift of up to $70,000.00 can be made in one year for a qualified 529 plan.

When it comes time for any kind of tax planning, keep in mind that your attorney (unless he or she is also a C.P.A.), is prohibited from giving you tax advice; so, your accountant will be your primary resource for that, and can make recommendations that you take to your estate planning attorney for implementation.

Stay tuned for Part II to learn more about how taxes are implemented when you create a “taxable gift”.

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