Frequently, taxpayers think that gifts of cash, securities, or other assets that they give to other individuals are tax-deductible and, in turn, the gift recipient sometimes thinks that income tax must be paid on the gift received. Nothing is further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are related to estate tax laws.
When a taxpayer dies, the value of his or her gross estate (to the extent that it exceeds the excludable amount for the year) is subject to estate taxes. Naturally, individuals want to do whatever they can to maximize their beneficiaries’ inheritances, and limit the amount of tax the estate may owe. Because giving away one’s assets before death reduces the individual’s gross estate, the government has placed limits on gifts, and if those gifts exceed the limit, they are subject to a gift tax that must be paid by the giver.
Gift Tax Exclusions—Certain Gifts Are Excluded from the Gift Tax
Annual Exclusion
This is the annual amount that an individual can give to any number of recipients. This amount is adjusted for inflation, and for 2013, it is $14,000, and can be in the form of cash, property, or a combination thereof. For example, a taxpayer with five children can give $14,000 to each child in 2013 without any gift tax consequences. The taxpayer cannot deduct the gifts, and the gifts are not taxable to the recipients. Generally, for a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the recipient’s enjoyment of the gift can’t be postponed to the future. For gifts to minor children, there is an exception to the “present interest” rule, where a properly worded trust is established. If the total of all of your gifts to each individual is not over $14,000, then there is no gift tax return filing requirement.
Lifetime Limit
In addition to the annual amounts, taxpayers can use a portion of the federal estate tax exemption (it is actually in the form of a credit) to offset an additional amount during their lifetime without gift tax consequences. However, to the extent that this credit is used against a gift tax liability, it reduces the credit available for use against the federal estate tax at the time of the taxpayer’s death. For 2013, the credit-equivalent lifetime gift tax exemption is $5.25 million. If you made a gift to any individual in excess of $14,000 during the year, a gift tax return filing for the year is required even if there is no tax due. The filing allows the IRS to track your federal estate tax exemption reduction as a result of gifts, and includes the tax if you exceed the current lifetime limit.
Education and Medical Exclusion
In addition to the amounts listed above, there are two additional types of gifts that can be excluded from the gift tax:
Amounts paid by one individual, and on behalf of another individual, directly to a qualifying educational organization as tuition for that other individual.
Amounts paid by one individual, and on behalf of another individual, directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion.
Caution: Watch out for unintended gifts such as when an elderly parent places a child on title of the home or other assets.
Gift-Splitting by Married Taxpayers
If the gift-giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can only give $28,000 a year to each recipient under the annual limitation previously discussed.
If you believe that you have a gift tax filing requirement, have additional questions or would like assistance planning an appropriate gifting strategy, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
