It may be better to give than to receive, but it is even better to give without worrying about being taxed on your generosity. In addition to the joy and satisfaction it brings, making financial gifts to your children or others can be an integral part of a comprehensive estate plan – so long as you avoid any unintended tax consequences.
The Internal Revenue Code establishes reporting requirements for gifts, provides limits and exemptions for gifting, and imposes tax obligations when gifts exceed those limits. Here is what you need to know about the limits on annual gifting.
$15,000 Annual Limit
As a preliminary matter, it is important to note that not all gifts, like the $10 checks your grandmother sent you on your birthday, come with tax consequences or require the filing of a federal gift tax return. In fact, even if grandma’s birthday check this year was for $14,000 and she gave you no other gifts, she would not need to concern herself with the IRS.
As of 2019, individuals may give gifts of up to $15,000 in cash or assets each year to a child or any other person without tax consequences. The $15,000 annual exclusion is per recipient. This means a generous person can give multiple individuals up to $15,000 each year. The cap also applies per gifter. As such, parents can give each of their children a combined total of up to $30,000 each year without filing a gift tax return.
If, however, your gift giving exceeds these amounts in any given tax year, you must report any gifts over the limit to the IRS by filing a Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return. But remember, just because you may need to file a gift tax return with the IRS does NOT mean you will actually be on the hook for any federal taxes because of your gift giving.
A lifetime cap on gifts complements the annual limits on gifting. The estate and gift tax exemption for 2019 is $11.4 million per individual, up from $11.18 million the previous year. A married couple filing jointly will thus have an $22.8 million lifetime exemption from federal gift taxes.
Not All Gifts Count as Gifts
There are three types of gifts that the IRS does not consider gifts for tax purposes, meaning no exemptions, caps, or tax triggers apply. These are:
- Gifts between a husband and wife who are both U.S. citizens;
- Charitable donations; and
- Gifts paid directly to an educational or medical institution for another’s tuition expenses or medical bills.
Properly distributing gifts or transferring assets to family members or others requires long-term planning, proper structuring, and sound advice from experienced counsel. If you have questions about estate planning, gifting, or tax implications, please contact one of the attorneys in Kreis Enderle’s Estate Planning practice group today.