Overview
A gift tax is a tax on the value of gifts made to others during the taxpayer’s lifetime. The gift tax complements the estate tax, which taxes distributions made at death. The gift tax was created, in part, to impede the attempts of those who tried to evade the estate tax by making gifts of their assets prior to death.
The View From the IRS
The Internal Revenue Service (IRS) takes a broad perspective on what constitutes a gift and may apply gift taxes to the transfer of any property or assets or the use of income-producing property offered without expecting something of equivalent value in return. Thus, selling something for less than full value or making an interest-free or reduced-interest loan may constitute a gift. A gift can also be direct (a cash gift to a grandchild) or indirect (a cash gift to a child’s trust).
Annual Exclusion
Fortunately, there is an annual exclusion (currently $15,000 per recipient) for the amount that the taxpayer may give to another in a calendar year without being subject to or paying any gift tax. The tax only applies to the gift amount exceeding the annual exclusion.
Married Couple Gifting
Additionally, if both spouses consent, a married couple may split a gift so that one-half is considered made by each spouse. This doubles the annual exclusion to $30,000 per individual recipient, allowing more to be given tax-free during a calendar year.
Exclusions to Know About
Notwithstanding the above, there are unlimited exclusions for certain gifts. If a taxpayer pays tuition directly to a qualified educational institution or pays a health care provider directly for medical services, such payments are not subject to gift tax and are not counted toward the $15,000 annual exclusion for the individual benefiting from the payment – whether or not there is any relationship between the person making the gift and the individual who benefits.
IRS Requirements
If you make gifts during a calendar year to another individual, Federal tax law requires taxpayers to file a gift tax return by April 15 of the year following the gift when:
- Gifts were given to at least one person (other than a spouse) that exceeded the annual gift tax exclusion amount for the year.
- The taxpayer and spouse split a gift.
- The person receiving the gift, other than a spouse, cannot possess, enjoy or receive income from it, until sometime in the future.
- The taxpayer gave a spouse a property interest that will end sometime in the future.
There Is More You Should Know
Making gifts can be tricky, yet they are important to reducing estate taxes. This article covers only the basics. If you are considering making gifts as a strategy to reduce estate taxes, consult with a Cincinnati estate planning attorney who can help you take the best advantage of the gift tax laws and reduce your estate tax exposure.
Common Legal Terms
Healthcare Power of Attorney: A legal document that allows an individual to designate another person to make medical decisions for him or her when he or she cannot make decisions for himself or herself.
Living Will: The purpose of this Living Will Declaration is to document your wish that life-sustaining treatment, including artificially or technologically supplied nutrition and hydration, be withheld or withdrawn if you are unable to make informed medical decisions and are in a terminal condition or a permanently unconscious state.
Your General Power of Attorney: (sometimes referred to as Financial Power of Attorney) – these are people you have chosen to manage your financial affairs if you are unable to do so.
Your trust: Sometimes called revocable trust or living trust. The trust holds and distributes your hard-earned assets during your lifetime and upon your death – as you have designated. A trustee, generally yourself, manages and distributes the trust assets according to the terms you designate in the trust.
Final Thoughts
Remember: “An ounce of prevention is worth a pound of cure.” When making your estate plans or when probating an estate or administering a trust, do not go it alone. Be sure to engage a Cincinnati estate planning attorney.
For more information about estate planning, probate, or trust administration in Cincinnati (and throughout the rest of Southwest Ohio) and to review free resources regarding estate planning, probate, or trust administration, visit my website. If you have questions regarding this article or a particular legal matter, feel free to contact me at 513-399-PLAN (7526). David H. Lefton is an Estate Planning and Probate Attorney. He is a partner in the law firm of Barron, Peck, Bennie & Schlemmer.