Gift tax planning can help to ensure that your state stays with your family and not the government or creditor. Here are the basics about Gift tax planning. See our other report regarding Foreign gifts.
The federal gift tax applies to the giver of a gift, not the recipient, for amounts above a specified level. Most gifts are sheltered from gift tax by the annual gift tax exclusion and the lifetime gift tax exemption (or both).
For starters, you can give gifts valued up to the annual gift tax exclusion amount each year without ever touching the lifetime exemption In 2018, it increased to $15,000 per recipient.
Unlike most other IRS inflation-based adjustments, the annual gift tax exclusion increases only in increments of $1,000. Thanks to relatively low rates of inflation, it’s taken five years for the annual exclusion amount to increase.
To illustrate how it works, suppose you have three adult children and seven grandchildren. In 2020, you could give each family member $15,000 — for a grand total of $150,000 — without owing any gift tax.
The annual gift exclusion is available to each taxpayer. If you’re married and your spouse consents to a joint gift — also called a “split gift” — the annual exclusion amount is effectively doubled to $20,000 per recipient for 2020. So, in the previous example, a married couple with ten family members could gift up to $300,000 in 2020) completely exempt from gift tax.
Lifetime Estate and Gift Tax Exemption
In addition, if you gift an amount that’s above the annual gift tax exclusion, you can also tap into the lifetime estate and gift tax exemption. The lifetime exemption for 2020 effectively shelters from tax $11.58 million, indexed for inflation.
However, if you tap into the lifetime gift tax exemption, it erodes the estate tax exemption amount that would be available when you die.
For instance, suppose an unmarried individual gives gifts to family members valued at $1,150,000 in 2018. After the annual gift tax exclusion is applied to $150,000 of gifts, the lifetime exemption can shelter the remaining $1 million from gift tax. That leaves an available estate tax exemption of $10.58 million if the individual dies in 2020 (assuming the decedent hadn’t ever tapped into his or her lifetime exemption in a previous year).
Exceptions to the Rules
Be aware that the following gifts are generally gift-tax exempt, preserving the full annual gift tax exclusion and unified exemption:
- Gifts from one spouse to the other spouse
- Gifts to a qualified charitable organization
- Gifts made directly to a health care provider for medical reasons
- Gifts made directly to an educational institution for a student’s tuition
For instance, if your granddaughter attends college, you might pay her tuition directly to the school for the 2019-2020 school year. The payments don’t count against the annual gift tax exclusion so you could still give her $15,000 in 2020. Furthermore, you may take advantage of a special tax break for gifts made to a Section 529 plan for a student beneficiary.
Do you need to file a gift tax return? For any gifts below the annual gift tax exclusion, you’re not required to file a gift tax return. However, you still may want to file one to establish the value of certain gifts of property with the IRS.
A gift tax return is required if you individually exceed the annual gift tax exclusion amount or a joint gift with your spouse collectively exceeds the amount. For the latter, each spouse must file an individual gift tax return for the year in which they both make gifts.
The deadline for gift tax returns is April 15 of the year following the year of the gift, the same as the due date for personal income tax returns. (The deadline is moved to the next business day if it falls on a weekend or holiday.) So, for gifts made in 2017, you must file a gift tax return by April 17, 2018. However, if you extend your federal income tax filing to October 15, 2018, the extension also applies to your gift tax return.
This year end, estate planning is complicated by the potential for sweeping tax law changes. The current congress essentially doubled the life estate and gift tax exemption to $11.4 million (adjusted for inflation) in 2017. After 2024, congress will re-evaluate the estate and generation-skipping tax, either eliminating it all together, bringing it back to the $5.4 million it was at prior to the 2017 Tax Reduction Act, or leave it where it is currently in that year.
Absent any radical developments, there still would be an incentive to give lifetime gifts from a tax perspective. For instance, you might gift securities or other assets to younger family members in lower tax brackets for two key reasons:
- To reduce the size of your taxable estate. As long as a federal estate tax remains in effect, this could still be beneficial, especially to elderly taxpayers.
- To transfer income-producing assets to younger family members in lower tax brackets. This could create income tax savings for your family over time.
Generally, the value of the assets for gift tax purposes is their fair market value. However, if you give away property, such as stock that has appreciated in value, the recipient must use your basis (usually, the original cost) to compute the taxable gain if he or she subsequently sells the property. Depending on your situation, you might arrange to sell property first and give the cash proceeds to another family member. The subsequent gift is covered by the annual gift tax exclusion.
Transferring wealth for your family typically calls for long-term planning. To maximize the tax benefits, you should engage in a systematic series of gifts over several years. For example, you may arrange to give five family members gifts totaling $75,000 ($15,000 x 5) in 2020. All of the gifts would be exempt from gift tax.
Your Attorney or tax adviser may suggest other creative and sophisticated estate planning tools, including Family Limited Partnerships (FLPs) and intentionally defective grantor trusts (IDGTs), designed to maximize the benefits of the $11.58 million exemption in 2020.
To find out more about this possible way of reducing taxes and protecting your estate, Call us at Beyer, Pongratz & Rosen to arrange a FREE Consultation before year end to discuss options to protect your estate from Taxes, Loss in case of a Medical Emergency, Creditors or others.
If you have additional questions about gift tax planning or any other aspect of estate planning, then please contact the office of Beyer, Pongratz and Rosen, by phone at 916-369-9750 or online For a Free Consultation.