Clients often ask me what are the tax consequences of gifting money or other assets to children, grandchildren or other individuals. There is no income tax to the recipient of a gift and no deduction to the person making the gift. The tax rules we’ll be discussing actually fall under the Federal Estate and gift tax system.
I THOUGHT THE ESTATE TAX WAS ONLY FOR THE SUPER-RICH?
- Let’s discuss some basic terms and key figures first.
- The first key figure is $12,060,000. This is called the basic exclusion amount (sometimes called the exemption amount), and this is the amount of net worth a person can have at death without triggering Federal Estate tax.
- So, yes, the Estate tax only applies to the very wealthy.
- However, the IRS does include certain gifts made during life in the calculation of the exemption amount. For example, someone worth $13 million today cannot give all their assets away on their deathbed and escape estate tax altogether.
- This is where the Federal gift tax rules come into play and these rules can impact far more than just the very wealthy.
YOU SAID ONLY ‘CERTAIN’ GIFTS ARE COUNTED – WHAT DOES THAT MEAN?
- The second key figure is $16,000, known as the annual exclusion amount. This is the amount that any person can gift away to any other person during a given year.
- Assume I give my son $17,000 to buy a car, and make no other gifts for the year.
- I have exceeded the $16,000 annual exclusion. As a result, I need to now file a Federal gift tax return to inform the IRS that I have used $1,000 of my estate exemption during life. At death, I now have $12,060,000 less $1,000 or $12,059,000 available.
- The gift tax return is due the same date as my personal income tax return, Form 1040, for the year of gifting.
ARE THERE OTHER EXCEPTIONS OR RULES TO BE AWARE OF?
- Absolutely, but we will only discuss the basic rules that apply to most people here.
- First, the $16,000 annual exclusion applies to an unlimited number of recipients. For example, assume a grandparent has 10 grandchildren. They can gift up to $16,000 to each of them ($160,000 total) and not trigger a filing requirement.
- Second, the $16,000 also applies to each person making a gift. With proper planning, then, a married couple can gift up to $32,000 to others each year.
- Third, if you pay someone else’s tuition and/or medical expenses directly to the school or provider (e.g. doctor), the IRS will ignore this as a gift altogether. This exception is for unlimited amounts.
Be sure to talk to a tax professional if you have any questions about tax rules related to gifting to family or others.