Hello everyone,Tis the season of gift giving. If you are planning on handing out significant gifts of property, assets, or money to your children, grandchildren, or whomever this holiday season you should check out the following: First, let’s talk about gift taxes. A gift tax is a tax on the value of gifts made to others during a 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 before death. How does the IRS view a taxpayer’s gifting? The Internal Revenue Service (IRS) takes a broad perspective on what constitutes a gift. It 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). A bit of good news … Fortunately, there is an annual exclusion (currently $16,000 per recipient) for the amount 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. What if you’re married? 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 $32,000 per individual recipient, allowing more to be given tax-free during a calendar year. More good news … 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 $16,000 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. What does the IRS require? 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.
These are guidelines, and you need to be careful. Making gifts can be an important way to reduce estate taxes. I’ve only outlined the basics. It’s best to consult with an estate planning attorney who can help you take the best advantage of the gift tax laws and reduce your estate tax exposure. Let me know if I can help in any way. Meanwhile, I hope the upcoming holiday season is a happy and healthy one for everyone.