Don’t Let the Fear of Gift Taxes Stifle Your Generous Spirit

Have you ever considered gifting a loved one cash or property but held back because you were worried about federal gift taxes? Here’s why you shouldn’t let that stop you next time.

True, the IRS can impose a gift tax on the transfer of money, property, and other assets when the person making the gift receives nothing (or something of lesser value) in return. However, two factors prevent this tax from being much of a concern for most people: the $15,000 annual exclusion and the $11.4 million lifetime exclusion. Let’s look at the annual exclusion first.

An Annual Exclusion on the Gift Tax 

If you give more than $15,000 in cash or other assets (land, stocks, a new car, etc.) to another person in a single year, you’re required to file a gift tax return. This does not mean you’ll actually have to pay anything in gift taxes (you’ll learn why later), but you do need to file IRS Form 709 to disclose that you made the gift.

In addition, the annual gift exclusion is calculated per recipient—it is not based on the total value of all the gifts you make in a year. For example, in a single year you could give your son $15,000, your daughter $15,000, your grandson $15,000, and so on, without having to pay a nickel in gift tax or file a gift tax return. Furthermore, the annual exclusion is “per person,” meaning you and your spouse can gift a combined $30,000 per year to each of the family members we just mentioned without having to pay gift taxes or file a gift tax return.

It’s also worth noting that gifts between spouses are unlimited and typically do not necessitate a gift tax return; gifts to nonprofits are considered charitable donations, not gifts; and the individual receiving your gift generally does not have to report the gift.

The Lifetime Gift Tax Exclusion

Now let’s look at the lifetime gift tax exclusion, which, as you’ll recall, totals $11.4 million. That’s $11.4 million per person, meaning a married couple has a lifetime exclusion of $22.8 million. Here’s where things get really interesting.

Let’s say you give your son $70,000 this year. Clearly, you have exceeded your personal $15,000 annual exclusion and you will need to file a gift tax return. However, it’s unlikely you’ll have to pay any gift taxes. That’s because the extra $55,000 ($70,000 – $15,000) will count against your $11.4 million lifetime exclusion. If you give your son an additional $70,000 next year, the same rule applies: you’ll use up your $15,000 annual exclusion but the excess $50,000 will count against your lifetime exclusion.

In essence, when you file those annual gift tax returns, the IRS tracks them and counts your gifts against your lifetime exclusion rather than your annual exclusion. You would have to exceed your $11.4 lifetime exclusion before any gift taxes must be paid.

What if you’re wealthy enough, and generous enough, to gift more than your lifetime exclusion? Well, gift tax rates range from 18% to 40% and the person who makes the gift is typically responsible for paying the gift tax. However, even then, with proper planning you still might be able to avoid gift taxes entirely. We can show you how.

Get Help From an Experienced Tax and Estate Planning Attorney

Attorney Clifford M. Cohen has more than 35 years of experience helping people in the Maryland and D.C. area and is available to answer any questions you may have. Contact us today at 202-895-2799 for a free case evaluation.