“Gifting Responsibly and Avoiding Taxes”

Each year, the IRS sets a limit called the annual gift tax exclusion which determines how much you can “gift” to someone else and avoid paying any taxes.  For 2020, that annual exclusion amount is $15,000 (this can change from year to year, so it is important to check the current amount when you are ready to make a gift).  The good news is that spouses and charitable organizations are exempt so you can exceed the annual exclusion amount without any concern. However, If you give someone else more than the $15,000 exclusion, you are required to complete Form 709 and report the gift for tax purposes.  So, what happens if you want to give someone more than this? What is a responsible way to think about gifting funds to other individuals so that you do it lawfully, while avoiding unwanted taxes and estate complications?   Double (or quadruple) your limit The key to avoiding gift taxes and filing of forms is to give no more than the annual exclusion amount to any one person in a given tax year. For 2020, that amount is $15,000.  This means if you want to give ten people $15,000 each in one year, the IRS won’t care. However, if you give $16,000 to just one person, you must pay a gift tax. The annual exclusion amount does rise periodically due to inflation, so it’s important to double check the amount each tax year to ensure you don’t give over the limit.  Being married is an easy way to double your giving power as both you and your spouse are entitled to the annual exclusion amount on a gift. As long as the gift is given from joint property, the IRS considers the gift to be half from each. Therefore, you and your spouse can give $30,000 total in 2020.  The same rule applies when you give to someone who is married. You can give an additional gift of up to $15,000 to the recipient’s spouse, making the annual limit from one couple to another couple $60,000 ($15,000 X 4 = $60,000).   Pay Medical or Tuition Bills Directly Under Section 2503(e) of the Internal Revenue Code, tuition payments made directly to an educational organization on behalf of a person, and payments for a person’s medical care made directly to the provider are not treated as taxable gifts. This can be an important exclusion for planning purposes. For example, grandparents who already take full advantage of the annual exclusion for gifts to grandchildren can make additional tax-free transfers by paying their grandchildren’s tuition for private school or college.  If you do plan on making a payment for someone’s medical expenses keep in mind that they cannot also be covered by their health insurance, otherwise it will be counted as a taxable gift.   Utilize Your Lifetime Estate Tax Exclusion If you are in a circumstance where you simply would like to gift someone more than the annual exclusion amount of $15,000 what options do you have?  For 99% of people, they can utilize the lifetime estate tax exclusion to offset the gift they make.  The federal estate tax exclusion is the mechanism that connects gift tax laws with estate tax laws, and we will provide an example below. If a single parent would like to make a $100,000 gift to their child in 2020 they would first be allowed to offset the annual gift tax exclusion amount of $15,000 and would then have to deal with the remaining $85,000 for tax purposes.  This $85,000, however, would NOT generate a tax owed in that year if they choose to count it towards their lifetime estate tax exclusion amount which is currently $11.58M.  By filing form 709 correctly, it would simply mean that their lifetime estate tax exclusion amount is reduced from $11.58M to $11.495M which for most individuals would not make a difference. If you are thinking about giving or receiving a sizeable gift it is important to consult a tax professional and ensure the person donating the funds is thinking through all of the possibilities and tax consequences. After all, giving and receiving gifts should be an enjoyable experience!