All this month, I’ve been talking about debt. So why is this blog talking about gifting?
Well, here’s my thought train: let’s say you have some debt and your parents or your grandma or your favorite aunt gives you some money to pay it off. Just, out of the goodness of their heart and because they love you.
If you are the gift RECEIVER, you don’t owe any taxes on it. It’s like free money to you. Rock on, right?
But if you are the gift GIVER (of money), and you give TOO MUCH, you must pay taxes on the gift. Maybe. Of course, it depends.
The IRS sets annual gifting limits every year. Sometimes the limit doesn’t change from the prior year. For a long time, it was $10,000 per person per year. In this blog, I’m going to attempt to explain the very complicated gifting rules and gift tax in an extremely simplified manner. Big picture, if you give away too much, then the IRS looks at it like you are trying to give away your assets for nefarious reasons. This includes things like trying to qualify for Medicaid, lower your estate for tax purposes, or moving assets to someone in a lower tax bracket. So, they set limits on how much you can give away per person, per year, and in your lifetime. A good attorney can help you navigate these rules and point out how you can use them to your maximum advantage with different types of special trusts.
Here are some rules of the road:
- If you are married, you can usually* give as much as you want to your spouse
- In 2021, you can give $15,000 to any one person with no consequences. This is called the Annual Gift Exclusion Limit.
- If you are married, you can do what is called a “split gift.” Meaning, you can give $30,000 to one person, from your account, but if your spouse consents, then it can be considered a gift from both of you, and therefore, $15k from each person, which is the limit.
- There is a special rule for 529 plans where you can frontload it with 5 years of gifts all at once.
- The annual lifetime exemption is $11.7 million (as of 2021), which is the same as the estate tax exemption, which is the same as the Generation Skipping Tax (GST) exemption. These things are typically the same amount, but it doesn’t mean that you get 3x the amount to gift….you are subject to one exemption, which counts towards different things, simultaneously.
- Note that the new tax law that is proposed (as of this blog post, no bill has been passed yet), Congress wants to cut the exemption to $6 million per person.
- If you gift “too much” to one person in a year, it should be reported on a Form 709, the gift tax return.
- The giver is always responsible for the tax. The givee never pays any tax to receive the gift.
What is a gift? It can be cash, but it can also be the value of things, like a car, or house, or securities, which is why you need to be careful when you add someone’s name to an account or property.
If you give directly to these institutions, it does NOT count against your annual exclusion or lifetime exemption:
- Tuition or medical expenses you pay for someone (the educational and medical exclusions).
- Gifts to your spouse.
- Gifts to a political organization for its use.
In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.
For further info, you can go to https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes#3.
*Exceptions are if the spouse is not a U.S. citizen, but you are.
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