Gift Tax

Understanding the Gift Tax

Rarely does anyone ever pay gift taxes. That’s right, you probably will never have to pay a gift tax. Ever! The IRS has rules, lots of ’em, and gifting is no exception, but the gift tax is one of the most misunderstood and easiest to avoid.  

Many people believe you can only give a certain amount each year without incurring gift taxes, and that’s sort of true. You have an annual exclusion amount that you can give to as many people as you wish each year. An exclusion means it’s not even counted toward the gift tax calculation.  In 2019 is $15,000.

So why is that sort of true? Even if you give ten people more than $15,000 in one year, unless you’ve given more than your total lifetime exemption amount of $11.4 million (2019) there’s no gift tax owed. That’s a lot of zeros that you can gift.

Here’s an example

Let’s say you’re feeling generous and give 5 family members $20,000 each. That’s $100,000 total, but you would have only used up $25,000 of your $11.4 million exclusion. Why only $25,000? Remember, the first $15,000 that you gift to each person per year is excluded, sooo…

  1. $20,000(gift to each person) – $15,000 (annual exclusion per person) = $5,000 over the annual exclusion for each gift
  2. $5,000 x 5 family members = $25,000 total amount over the annual exclusion
  3. $11,400,000 (2019 Lifetime Exemption) – $25,0000 (total amount over the annual exclusion) = $11,375,000

You still have $11.3175  million left to gift over your lifetime

Don’t worry, it’s tied to inflation. So if want to give $11.5 million, which is over the limit, don’t fear, you most likely will be able to give away a bit more in future years as the limit increases. You can stop your worrying now.

Remember, each year you can give $15,000 to any individual or any number of people and those funds will never count towards your lifetime limit. So in reality, you can gift more than $11.4 million.

The gift giving goodness just keeps getting better…

The annual exclusion amount and lifetime exemption amounts are per individual. Couples can team up and give $30,000 to any individual ($15K each) per year or $22.8 million.

And better…

There’s a special rule called a 5-year election that lets you give five year’s of annual exclusion gifts at one time.

So Grandpa could give you $75,000 ($15,000 x 5) in one year, and as long as he hasn’t given away more than his lifetime exemption of $11.2 million, there’s no gift tax. Grandma could also gift you $75K as well.

There are some gifts that don’t even count as gifts, and those amounts are unlimited!

  • Gifts to a spouse: As long as your spouse is a U.S citizen, otherwise different rules apply.
  • Educational expenses: To qualify for the unlimited exclusion for qualified education expenses, the gift must be a direct payment to the educational institution for tuition only. If your granddaughter goes to Penn State and you want to help with tuition, you must pay Penn State directly and for tuition only. Books, supplies, and living expenses do not qualify. Those expenses would fall into the $15,000 annual gift exclusion category.
  • Medical expenses: Medical payments must be paid directly to the entity that is providing the care in order to qualify. The expenses that qualify include diagnosis, treatment, procedures, and transportation.  Also included is the payment of premiums for medical or long-term care insurance.

While the rules are straightforward (at least I think so) there is paperwork involved. We are dealing with the IRS. The first thing to know is that the recipient does not pay the gift tax, the giver does.

The IRS wants to keep track of the gifts you give. If you make a taxable gift, that is one that exceeds your $15,000 annual exclusion; you must file Form 709: U.S. Gift (and Generation-Skipping) Tax Return, which is due April 15.

Even if you don’t owe a gift tax because you have not reached the $11.4 million limit, you are still required to file this form. Remember, you must keep a copy for the rest of your life to document proof of the lifetime exemption.

There it is, the gift tax easily explained, I hope. Giving gifts has a number of consequences for the giver and the receiver, so please see an attorney, tax specialist, or your CERTIFIED FINANCIAL PLANNER(TM) professional. Creating a plan for any gifting in advance is the key.

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