There are many questions about giving money to children during your lifetime, and most of them concern taxes.
Giving your children, or other heirs, gifts while you are still alive can be a very fulfilling experience: you get to see what they do with their early inheritance. However, many people aren’t sure about the tax implications of gifting. A recent article posted on nj.com, “Gift tax consequences for you and your heirs,” gives readers a general look at gifting and taxes. It should be noted that large estates often incorporate gifting as part of an overall estate plan and should have the guidance of an experienced estate planning attorney.
The IRS considers a gift to be any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) isn’t received in return. However, there are exceptions to this rule. Generally, the following gifts are not taxable:
- Gifts that aren’t more than the annual exclusion for the calendar year;
- 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; and
- Gifts to qualifying charities are deductible from the value of the gift(s) made.
The federal estate and gift tax exemption is $5.49 million per person this year, which means that a person can leave and/or gift a total of $5.49 million to their heirs without paying federal estate or gift tax. The cutoff will typically increase with inflation each year. Accordingly, the amount will be $5.6 million beginning on January 1, 2018.
Making a gift or leaving your estate to your heirs doesn’t impact your federal income tax. You can’t deduct the value of gifts you make, except for gifts that are deductible charitable contributions.
You must then consider your state taxes. Take, for example, New Jersey. The Garden State has an estate exemption of $2 million in 2017. The state’s estate tax is planned to be repealed entirely in 2018, and New Jersey doesn’t impose a gift tax.
There is a federal annual gift tax exclusion amount that doesn't count toward the lifetime gift exemption. That annual gift tax exclusion amount is $14,000, and has been so since 2013. As a result, a person can give away $14,000 to as many people as he or she would like without a tax issue. Note: That amount is increasing to $15,000 beginning on January 1, 2018.
There’s no gift tax return to be filed, if the annual gifts total $14,000 or less to each individual donee.
Every family’s situation is different, so it’s a good idea to speak with an experienced estate planning attorney to make sure that you are making the most out of gifting, both in terms of tax and experiencing the joy of generosity.
Reference: nj.com (October 5, 2017) “Gift tax consequences for you and your heirs”