Chanukah is right around the corner. So is the end of another tax year. Many are thinking of gift giving, and wanting to plan and budget smartly. This may be doubly true if you are thinking about your estate plan and if and how you can pass on your wealth during your lifetime. Depending on the size of any planned gift, you may need to consider IRS rules and the gift tax (or, at least, a gift tax return.)
First, know the gift tax is paid by the gift giver and not the recipient. Second, know that no gift tax is owed on gifts unless and until you have given away more than $11.4 million in cash or other assets during your lifetime as of 2019. Third, even though this exclusion will only ever be a concern for a small sliver of the population, a gift tax return, Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return, must be filed with the IRS for any gift more than $15,000.
The annual gift tax exclusion allows you to give away gifts of up to $15,000 each, to as many recipients as you wish, without needing to file a gift tax return, and without those gifts counting against your total lifetime exemption. As an example, let’s say you want to give your grandchild $10,000 to save toward college expenses. And you want to give your adult child $30,000 to help with a home purchase.
The $10,000 gift is relatively straightforward. It falls below the annual gift tax exclusion amount of $15,000 (note this is the 2019 amount, and the exclusion can change from one tax year to the next), so no tax would be owed on it, and no gift tax return would be filed. The $30,000 gift is a bit more complicated. Unless you have already given away $11.4 million in assets (and if you are married each spouse can give away up to $11.4 million), you will owe no gift tax. But, you will still need to file a gift tax return because it exceeds the annual exclusion amount.
What if you then wanted to give another $20,000 to your other adult child to help pay for a wedding. This $20,000 gift will require a gift tax return because it is over the annual exclusion amount. The amount counted against your lifetime exclusion is $5,000 (or the $20,000 gift value minus the $15,000 annual exclusion).
Make sense? It sounds complicated, but the truth is that most people will never be concerned with the lifetime exemption. Most people will need only be concerned with whether or not they need to file a gift tax return to comply with federal tax laws. That said, this type of gift giving is frequently used for estate planning purposes in order to reduce the amount of a taxable estate, so if this might be an issue for you and your loved ones, it is important to seek assistance from qualified tax and financial planning professionals.
A few further points: Contributions to 529 college savings plans are considered gifts to the beneficiary of those funds. But a special rule has been carved out that allows a lump sum to be contributed and spread out over five years for purposes of the gift tax. And, some types of gifts are exempt from the gift tax altogether, such as charitable donations, gifts to a spouse, and gifts to pay for another’s education or medical expenses.
Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.