While taxes may not be top of mind right now, gifting just may be. Whether you’re picking out the perfect gift for a graduation, wedding, bridal or baby shower, keep in mind the Gift Tax – the IRS write off that allows you to give up to $17,000 to any number of people without facing any gift taxes, and without the recipient owing any income tax on the gifts.
You might be thinking, “it’s my money and I’ll do with it what I want.” Nice thought, but not quite true. You needed to account for it when you earned it, and likely paid tax at that time, and you need to be aware of the rules for giving it away if that’s your intention. Why would you want to do that? The estate tax exclusion has ticked up over the years, and is now $12,920,000. Gifting while you’re still alive can minimize or eliminate the potential estate tax. You know, few things say ‘I love you’ as well as a big check.
Let’s start with the simplest gift issue. You can give your spouse unlimited cash or anything of value with no gift tax consequences. If your spouse is not a citizen the limit is $175,000.
For anyone else, you may gift up to $17,000 per year per person with no tax due and no paperwork required. Your spouse has the same opportunity, so between you, that’s $34,000. If you have two children and they are married, you can see how this can multiply up pretty quickly.
There are some exceptions to this limit. You may pay anyone’s medical bill or higher education expenses with no concern for the limit. To avoid running afoul of the rules, the funds must be sent directly to pay the bill, you cannot send your child a check for $40,000 even if he writes his college a check the same day you’ve just gifted in excess of the limit. Gifts to qualified charities are also not subject to gift taxes regardless of the amount.
There is also an opportunity to transfer more than the $17,000 per person by taking advantage of the 529 college savings account. Current tax law permits you to gift up to 5 years in advance, i.e. a present gift of $85,000. This strategy will require a properly filled out Form 709 gift tax return even though no tax is due.
It’s also prudent to use the 709 to account for any large dollar transactions involving family. For example, you sell a house to a child for $250,000. Years from now, when you pass on, the IRS, while auditing your estate return, may decide that the house was worth far more and assess estate taxes. By filing the 709 and declaring the value of the transaction, you’ve started the 3 year clock on the IRS, once passed, the transaction cannot be questioned.
Don’t worry about knowing these tax rules. TurboTax will ask you simple questions and give you the tax deductions and credits you are eligible for based on your answers.