One of the great joys of financially independent clients is gifting to family members during their lifetime. Unfortunately, there are many gifting myth's that linger. We routinely receive questions that go something like, "How much am I allowed to gift to my daughter this year without having to pay gift tax?"
I would like to clear up several gifting myth's in this article using a question and answer format. I would like to thank Gregory Weinig, a tax and estate attorney a Connolly Gallagher for his review of this this article.
Q: I can only give away $15,000 in one year, right?
A: You can give away as much as you would like!
Q: What? But if I gift more than $15,000 in one year, my daughter will owe gift taxes?
A: Recipients of gifts never pay upon receipt of the gift (except under very unusual circumstances). Instead, it is the giver of the gift who pays any gift tax.
Q: Ok, then I will have to pay gift tax if I gift more than $15,000 in one year to one person?
A: Most likely not. You see, each person (beginning in 2018) can give away $11.2 million dollars during their lifetime. Therefore, you would only owe gift taxes once you give more than this amount.
Q: Then why do I always read about the $15,000 gift limit which leads me to believe that is all I can give away?
A: Since everyone can give away $11.2 million dollars during their lifetime with no tax implications, the IRS needs a method of tracking each taxpayers use of their $11.2 million exemption by filing a gift tax return (IRS Form 709). In order to limit taxpayers' time filing tax forms, the IRS allows each person to gift $15,000 to any number of individuals in any tax year without having to file a gift tax return. This is called the "annual gift exclusion".
Think of it this way, if you gift an amount above $15,000, you begin to tap into your lifetime gift tax exemption of $11.2 million.
Q: If I gift more than $15,000 and file a gift tax return, will I owe any taxes at all?
A: Only if you have gifted more than the $11.2 million exemption during your lifetime. Since you haven't - and likely never will without hitting the lottery - you will never owe any gift taxes.
Q: Then what are the hidden downsides to gifting my daughter more than $15,000?
A: Just paperwork. Your tax preparer (or Mallard)will have to spend the time to file a gift tax return. Also, while not relevant in your case, since the $11.2 lifetime exemption applies to both gift tax and estate tax, your use of some of the $11.2 million dollars also reduces the amount of your estate that is exempt from estate taxes at your death. However, if you (like most Americans) don't get near this number, it is not a factor.
Q: How many people can I gift to without having to file a gift tax return?
A: You can gift up to $15,000/year to as many people as you would like without filing a gift tax return or using any of your $11.2 lifetime exemption!
Q: So, if I have three married children and six grandchildren, how much can I give away without having to file a gift tax return or use any of my $11.2 million exemption?
A: Because you are talking about twelve people (children, spouses, and grandchildren), you can gift a total of $180,000 (12*$15,000), and you can do this every year!
Q: How would that change if I were married?
A: Since each person can gift $15,000/year, you would double the amount you can gift to $360,000. This is because each of you can gift $15,000 to these same 12 people without filing a return or using your exemption (2*12*$15,000).
Q: Is there anything else I should know about gifting?
A: Gifts made directly to an educational institution (for tuition) or medical institution (for medical care) on someone's behalf bypass the entire system described above. In other words, don't gift the money to the person so that they can pay for college tuition as that will eat into your $11.2 million exemption. Instead, cut the check directly to the school.
Finally, gifting not only feels great, but it can be used to reduce your future potential exposure to estate related taxes (for Federal or State tax purposes). For example, as we have seen, the annual gift exclusion can be used to give away a lot of money without eating into your lifetime gift exemption. At the same time it reduces the size of your estate.
Q: Anything else?
A: Yes, these answers are the simple version that apply to most people, but may not apply to you based upon your circumstances. Therefore, it is always best to speak with a tax and estate attorney regarding making large gifts. For example, gifting to a generation more than one below you (say a grandchild or great-nephew) may be subject to another tax system (GST - Generation Skipping Transfers). Also, some states may have their own gift, estate, or GST systems that come into play. Finally, the laws are changing all the time. For example, the $11.2 million gift/estate tax exemption was half this amount only last year.
Q: What's the bottom line on gifting?
A: you can gift as much as you want to a child (in our example). It is only when you gift more than $15,000 that you must begin to track these gifts (and only the amount above the $15,000 exclusion) as usage of your $11.2 million dollar gift/estate tax exemption. You track these gifts via a gift tax return. Filing a gift tax return does NOT mean you will owe gift taxes. Instead, it is simply a tool to track your usage of your exemption. Only once you gift more than your $11.2 million exclusion will you begin to actually PAY gift taxes.
Too many people miss out on the joy of gifting to children while they are living, and instead leave a large inheritance at death. They do this in part because these gifting myths lead us to believe we can't gift without some sort of tax consequences. We hope this article dispels some of the most common myths.