Around this time every year, we tend to get a lot of questions about how to gift money or property without paying a tax. With that in mind, here’s a brief overview of some basics you need to know before your generous end-of-the-year giving.
When it comes to taxes on gifts, one thing to remember is that the concern is for the tax on the donor, not on the recipient. You can rest assured that your friend or loved one receiving the gift will not be responsible for paying taxes on the value of the gift. But because no good deed goes unpunished (or untaxed, as the case may be), there is a chance that you as the donor may be taxed if your giving exceeds certain limits.
As a donor, the magic number to remember is 14. The annual gift limit for 2016 is $14,000 PER RECIPIENT. That means a husband can gift $14,000 to as many people as he wants to, and a wife can do the same. As long as no gift above $14,000 is made by either spouse, there is no need to file a gift tax return. That’s good news, right?
And here’s some more good news: There is NO LIMIT on gifting money to pay for someone’s school tuition. So if you’re wanting to surprise that overachieving granddaughter of yours who has her sights set on college next fall, you won’t have to worry about paying taxes on your generosity. However, there is one catch…the tuition check must be written directly to the educational institution, not to the individual. Same rule applies if you are donating money for medical expenses. The payment MUST be made directly to the medical institution rather than to the person you are helping in order to be tax-free.
There is also a lifetime gift tax exemption to help lower your tax burden; that amount is $5.45 million. This means that in addition to the annual exclusion of $14K per donor, a person can gift up to $5.45 million during his or her lifetime without paying a gift tax. However, all gifts beyond the $14K annual exclusion reduce the donor’s estate tax exemption dollar-for-dollar and thus need to be reported on a gift tax return so the IRS can track it.
For gifts of property or securities greater than $14,000, we recommend a revocable living trust which can protect your loved ones from probate and potential creditors. That’s something we do for our clients every day.
Remember, this is “Gifting 101”; there are many more scenarios and exceptions too detailed for a single blog post. You can always come in for a free consultation if you have questions or would like to take your knowledge to the next level. We’d love to hear from you!