GIFT TAXES 101
Federal gift taxes are extremely confusing. While it may seem odd to most people that even giving away your property can result in tax consequences, as we all know, with the IRS, rules are rules and they must be followed (or else).
As a wills and trust attorney O’Fallon, MO I often discuss gift taxes with my clients during our meetings to discuss estate planning. Taxpayers have two exclusions or exemptions available to them, either on an annual basis or spread out over their lifetime.
The first is the annual gift tax exclusion. This is a set amount of money you can give away tax free to an unlimited number of people. A series of gifts made to the same person in a calendar year are not subject to gift if they don’t exceed the annual gift tax exclusion. For 2017, this number was $14,000. For 2018, there’s a bump to $15,000.
Here’s an example: Say in January 2018, you give your son $5,000, then another $5,000 in April 2018 and then a final $5,000 in December 2018. You’ve reached the cap for your son in 2018, but in January 2019 you could give them another $5,000, subject to the 2019 annual gift tax exclusion (not currently known).
Gifts can also be in kind. You can give stock, jewelry, or artwork for example tax-free as long as they don’t exceed $15,000.
If you’re married, you and your spouse each get an annual gift tax exclusion, so in the example above, your son could receive $30,000 in 2018.
The lifetime gift tax exemption is the total amount you can give away over your lifetime. These gifts are also free from tax. However, the total amount gifted over your lifetime will reduce the amount of exemption to protect your estate from estate tax at your death.
The good news is the estate tax exemption has been indexed to inflation as of 2013, which means it increases each year. Additionally, the Tax Cuts and Jobs Act, passed at the end of 2017, raises the exemption per spouse to $11.18 million in 2018. This is indeed a good problem to have.
Gifting is part of the estate planning process for certain individuals who are either concerned about taxes on their estate or want to help family members financially without incurring tax. Provisions in a living trust and powers of attorney often discuss taxes and the ability of trustees and/or powers of attorney to reduce taxes owed.
If you’re interested in gifting always remember that these opportunities require compliance with IRS regulations, including special filings. You should always obtain professional advice from a CPA or a tax attorney before considering gifting.