Good news for those caught up in the spirit of giving this holiday season: next year, in 2018, you will be able to give your loved ones even more without triggering the need to file a gift tax return. For the first time in five years, the gift tax exclusion will be going up.
Currently, an individual can give another person up to $14,000 in a calendar year without needing to file a gift tax return. If you are married, you and your spouse can each give that other person $14,000, for a total of $28,000. You’re unlimited in the number of such gifts you can make, so if you and your spouse wanted to give each of your adult children, and each of their spouses, an annual exclusion gift of $28,000, you could.
The annual exclusion amount for one person’s gift to one individual will be going up to $15,000 in 2018, meaning that a couple will then be able to give up to $30,000 to another person.
What if I Want to Give More Than the Annual Exclusion Amount?
If you want to make a more substantial gift to someone, such as helping your child with a large down payment on a home, there’s nothing to prevent you from doing so. You will need to file a gift tax return if the amount of your gift exceeds the annual exclusion amount. However, you will likely not have to pay tax on the excess amount; it will simply come out of your applicable exclusion amount. The applicable exclusion amount is the amount that the IRS allows individuals to give away tax free during their lifetimes before a gift tax is owed.
As of 2018, under current tax laws, the applicable exclusion amount will be $5.6 million dollars for an individual or $11.2 million dollars for a couple. That amount could double based upon some of the tax laws changes being proposed. Most people do not make gifts to others at that level during their lifetimes, so needing to file a gift tax return rarely amounts to the need to actually pay gift tax.
What is a “Gift” for Purposes of the Federal Gift Tax?
Obviously, as discussed above, gifts of money to family members are considered gifts. Other types of transfers also fall into this category, such as gifts of stock or other things of value. Generally, if something is transferred to another person for less than its fair market value (FMV), the amount between the amount paid (if any) and the FMV is considered a gift. Let’s say that you had a convertible that was worth $50,000 and you “sold” it to your adult child for $5,000. You didn’t really sell the car; you gave your child a gift valued at $45,000.
Gifting, both charitable and otherwise, can be a satisfying part of your estate planning. Making gifts during your lifetime allows you the enjoyment getting to witness how your gift makes others’ lives better.
In order to be a gift, a transfer must also be a present interest; in other words, something the recipient can access and use. If you create a revocable living trust and fund it with a million dollars, naming your child as beneficiary after your death, you have not made a million-dollar gift to your child in the present. At best, he or she has a future interest in that million dollars, and because you could revoke the gift at any time and terminate that future interest, it doesn’t count as a gift.
What if you wanted to pay your child’s college tuition, or a large medical bill that they incurred? So long as the gift is paid directly to the educational institution or medical facility by you (without stopping in your child’s hands or bank account in between), it is not subject to gift tax.
Gifts to spouses who are U.S. citizens are not subject to the gift tax. If your spouse is not a citizen of the United States, you may gift them up to $152,000 as of 2018 without needing to report the gift on a gift tax return.
Most donations to charities are also not considered “gifts” for the purpose of federal gift tax. The federal government wants to encourage charitable donations, so these types of gifts do not trigger gift tax reporting or payment requirements, and, of course, can be deducted from income when filing income tax returns.
Gifting, both charitable and otherwise, can be a satisfying part of your estate planning. Making gifts during your lifetime allows you the enjoyment getting to witness how your gift makes others’ lives better. If you are interested in making more gifts in light of the increased annual exclusion amount, contact your estate planning attorney to discuss the most effective way to do so.
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