When you think of tax planning, most people think about minimizing the amount of taxes we pay every spring when we file taxes. But there are provisions in the tax law that focus on gifts, and if gifting is part of your tax strategy or your estate plan, you should be aware of some of the basics of the gift tax.
You can give and receive taxable gifts in the form of money, property, or the right to use or receive income from property without receiving something of equal value at return. If you sell something for less than its full value or if you make a loan at no interest or with a reduced interest rate, it might be considered a gift.
Recently, madison.com posted an article, “Gift Tax: 6 Ways to Avoid Paying the IRS,” that details some of the exclusions and exemptions from the tax.
The annual gift tax exclusion. The IRS gives everyone the right to make gifts up to a certain dollar amount each year. Therefore, ordinary gifts, like birthday presents, aren't subject to the tax. The amount of the annual gift tax exclusion is adjusted for inflation every year, and this year you can give up to $14,000 without triggering a gift tax. This limitation is on a per-recipient basis, so you can make individual $14,000 gifts to as many people as you want, and a married couple can give a total of $28,000 to each recipient under the annual gift tax exclusion.
Marital deduction. The gift tax laws permit married couples to transfer money and property between the two spouses without any tax implications. You can typically give your spouse as much money or property as you want, without incurring a gift tax.
Gifts for education. Payments for educational expenses can qualify for a gift tax exclusion, if it covers only tuition. Gifts for the expense of course materials, room and board, or other educational costs don't qualify for this exclusion. They will count toward annual exclusion amounts. It is important to note that the donor must make the payment directly to the school. There’s no exclusion if you give the money to the student, and the student then pays the tuition.
Gifts for medical expenses. You can also give money toward covering medical care expenses or health insurance costs. However, you must make the payment directly to the healthcare facility or health insurance company to maintain the exclusion from gift tax.
Charitable deductions. Gifts to qualifying charities are exempt from gift tax.
Unified lifetime exemption from gift and estate tax. If you make a larger gift that’s not covered by the exclusions above, you can use your lifetime exemption. In your lifetime, you're entitled to a credit against gift and estate taxes that you incur. This credit increases each year for inflation. For 2017, it’s equal to the gift tax on gifts of $5.49 million. Therefore, even after you give $14,000 in annual gifts to everyone, unlimited gifts to a spouse or charity, and unlimited gifts toward medical or educational expenses, you can give up to an additional $5.49 million without paying any gift tax. Whatever credit you use, it reduces the unified credit you have left for your estate to use after your death.
While most people do not pay a gift tax, the hefty size of the tax—40%—makes it important to know about. An experienced estate planning attorney will be able to educate you further and help make sure that your generous spirit will not trigger this tax.
Tax planning, estate planning, business succession, and asset protection are all services offered by Legacy Counsellors, P.C. And, all of these services often intertwine. If you have a question about utilizing the gift tax exemption, please contact us today.
Reference: madison.com (June 27, 2017) “Gift Tax: 6 Ways to Avoid Paying the IRS”