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By Joelle Spear, CFP®, Financial Adviser, Partner
| March 13, 2020
You’ve done well in life, and now you want to share some of your wealth with the people you know and love. Perhaps you want to help your children make a down payment on a home. Or contribute to your grandchild’s college savings plan. Or give a retirement gift to a loyal household employee.
But one concern that might be holding back your generosity is the question of whether you’ll have to pay federal gift taxes. It’s a topic that comes up in all kinds of discussions of giving. But here’s the good news: In general, the only people who have to worry about it are the so-called “one percenters.”
Still, even if you probably will never have to pay gift taxes, it’s worth getting the answer to common questions about this widely misunderstood IRS provision.
Written by Joelle Spear, CFP®, a financial adviser and a partner at Canby Financial Advisors in Framingham, Mass. She has an MBA with a finance concentration from Bentley University.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
It’s a common misconception that the recipient of the gift is the one who has to pay the gift taxes. Not true. Generally, only the person making the gift is potentially subject to gift taxes and only if the value of the gift is more than $15,000 in one year. The recipient doesn’t have to pay them unless the person making the gift doesn’t pay or report it.
But here’s the good news: Most gifts will never be subject to gift taxes unless the giver gives more than $11.58 million over their lifetime. More on that later.
In 2020, you can give up to $15,000 per year to any individual without having to report the gift to the IRS. In fact, you can give separate gifts of $15,000 or less annually to as many people as you want without notifying Uncle Sam. Even better, if you’re married, you and your spouse can each give up to $15,000 to the same person without triggering gift tax issues.
The complications arise only when you give more than $15,000 to someone.
For most people, the only thing such a gift will generate is paperwork. You’ll have to file IRS Form 709 to disclose all gifts of over $15,000 for the year in which they’re made.
You and your spouse can’t file a joint Form 709 — each of you must file your own form for the applicable gifts you make individually. And, this being the IRS, there are numerous rules about how different kinds of gifts must be reported, so it’s always good to consult with your accountant or tax professional if you’re planning on making substantial gifts.
Money passed between married spouses who are U.S. citizens is never considered to be a gift, no matter the amount. Also, money you use to pay for someone’s medical bills or tuition expenses doesn’t need to be disclosed for gift tax purposes, as long as you pay the institution directly. And, surprisingly, gifts you make to qualified political organizations are exempt as well.
No. Other assets can also count, including gifts of real estate, stock shares, a car or fine art and collectibles. If the value of a non-cash gift is over $15,000, you will need to provide documentation of its fair value market to the IRS, including professional appraisals where required.
The only gifts that are potentially tax-deductible are those you make to qualified charitable organizations or giving vehicles, such as donor-advised funds.
You can if you want to. But you probably won’t need to. Why? Because everyone is entitled to a personal lifetime gift tax exclusion of $11.58 million.
What this means is that you can keep on making gifts of more than $15,000 (and filing Form 709) year after year, and all that will happen is that these gifts will be applied to your lifetime exclusion. You’ll never have to pay gift taxes unless your total lifetime giving exceeds this amount.
Possibly. The $11.58 million exclusion is used both for gift tax and estate tax purposes.
Meaning that all of the gifts of over $15,000 you make during your lifetime are deducted from this exclusion. The remainder can be used to reduce the taxable value of your estate when you pass on.
For example, let’s say that during your lifetime the total value of all the individual gifts of more than $15,000 you make amounts to $1 million. If you applied this amount to your lifetime exemption, “only” $10.58 million of the remaining amount could be used to reduce the taxable value of your estate.
Unless you’re one of the one percent of Americans whose net worth is $10 million or more, this shouldn’t be an issue.
The larger lifetime exclusion went into effect in 2018 as part of the Tax Cuts and Jobs Act of 2017. According to the IRS, the current lifetime gift and exclusion provision is in effect through the end of 2025, so any gifts you make until then will not be adversely impacted, even if the exclusion amount is reduced starting in 2026.
When the topic is taxes, the reality is almost always more complicated than it appears to be. For example, while the lifetime exclusion amount generally increases over time due to inflation, it could also be decreased before 2026 by an act of Congress and a future presidential administration.
And this lifetime estate tax exclusion only applies to federal estate taxes. Your state may have lower lifetime exclusion limits. For example, in Massachusetts only the first $1 million of an estate is exempt from estate taxes. (For more, read 18 States with Scary Death Taxes.) And these taxes must be paid before the remainder can distributed to heirs.
That’s why if you want to reduce the potential impact of estate taxes and keep your legacy from being tied up in probate, you should meet with an accountant or an estate planning professional to discuss strategies for removing these assets from your estate.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax adviser or lawyer.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered by Canby Financial Advisors are separate and unrelated to Commonwealth.