To gift or not to gift …. That is the question. When it comes to giving gifts to family (or non-family) members there are a lot of things to consider, including the fact that some of those gifts might have tax consequences later.
I THOUGHT THAT YOU CAN GIVE TAX FREE GIFTS UP TO A CERTAIN AMOUNT? IS THIS CORRECT?
Yes, you can. For 2018, you can give a gift to anyone you want of up to $15,000 with no gift tax returns and no questions. You can also, over your lifetime, give a gift of $5.6 million to individuals. In addition, that $15,000 that you can give each year does not count towards the $5.6 million. Therefore, you can give $5.6 million on top of $15,000 each year, but the $5.6 is a one-time shot.
ARE THERE ANY GIFTS THAT DON’T COUNT TOWARDS THE LIMITS YOU JUST MENTIONED?
Yes, there are. If you have a gift from husband to wife or from one spouse to another, or gifts to charitable organizations, those are not counted towards these limits. However, there are a couple other things that people don’t really think about. If you give a gift to a parent or you pay for their medical expenses directly to their healthcare providers, this is not counted as a gift. Either is tuition that you would pay for a student, assuming that student is not a dependent on your return. Those are not considered gifts.
SO ESSENTIALLY YOU CAN GIFT SOMEONE UP TO $15,000 PER YEAR, AND YOU CAN PAY FOR THEIR COLLEGE OR THEIR HEALTHCARE AND THAT IS O.K.?
That is correct. Not student loans, but college tuition.
SO WHERE DO TAXES COME IN?
Normally, if you just give cash, there is no tax consequences. Where you run into tax consequences is when you give away stocks or marketable securities, because it has what is called carryover basis. Carryover basis means, whatever I bought the stock for, that is what now you have the stock for, and if you sell it you have to pick up the gain on your return. The same thing goes for homes. Right now you can exclude between $250,00-$500,000 on the gain on a sale of a home. If you gift that home to your children, they may not have that same exclusion.
ARE THERE THINGS YOU CANNOT GIFT?
Absolutely! Number one, you cannot give away your income or your wages, your W-2 type income. You also cannot give away an IRA or your retirement plan. You essentially have to take the money out of those plans and then give cash, and then of course, you have to pick up that income on your return.
WHAT ABOUT PAYING EXPENSES FOR A CHILD? IS THAT A GIFT?
No it is not. There are two ways to think about it. The first is, if you are just paying normal expenses for your dependent children, that is not considered a gift. A gift would be if you give them some kind of stock or some kind of large gift on top of their normal living expenses.
WHAT ABOUT PAYING EXPENSES FOR GRANDCHILDREN? IS THAT A GIFT?
It would be considered a gift up to that $15,000, assuming they are not a dependent on your tax return.
SO YOU REALLY NEED TO KEEP TRACK OF WHERE YOUR MONEY IS GOING?
Most people don’t give away $15,000 in gifts, but if you know you are going to come close, then you will definitely want to keep track of it.
WHAT ARE THE REASONS WHY SOMEONE WOULD WANT TO MAKE SUCH A LARGE GIFT IN THEIR LIFETIME?
There are a couple of reasons. Let’s say someone’s parents are in a higher income tax bracket. What they could do is gift marketable securities, stocks and things like that to their children, and their children could later on sell that and maybe pay a much lower tax than what their parents would. Now we talked about Kiddie Tax rules earlier, and this would not apply for Kiddie Tax, but it is a way for the parents to either lower their estate or get that income tax at a lower bracket.
Knowing the potential tax ramifications of a gift is important to make sure that the gift is having the effect that was intended.