Many parents are generous to their children and grandchildren and the holidays may have resulted in an extra big gift this year. Don’t worry about the taxes. Usually the giver pays them, but it’s not likely that your parents owe anything to Uncle Sam.
If you are lucky enough to have such generous parents, make sure they understand the tax consequences of gifting. The fear of taxes related to gifting is usually over estimated.
In 2019, a person can give up to $15,000 per person, without any tax ramifications. However, even if the gift limit hits that level, the donor may only be required to file some paperwork. Generally the donor won’t owe an actual out-of-pocket tax payment, unless their cumulative lifetime gifts exceed the lifetime gift tax exclusion. For tax year 2018, that number is $11.18 million, and $22.36 million, if married filing jointly. The exclusion goes up to $11.4 million in 2019 and $22.8 million, if married filing jointly.
The annual gift tax exclusion is $15,000 and $30,000 for married couples filing jointly in 2018, which means the donor can give $15,000 to any person without creating a tax liability. If, for instance, a parent gives a child $20,000—that would be a reportable gift, as it exceeds the exemption amount. There’s most likely no tax due, but the parent must file a gift tax return and fill out IRS Form 709, so the government can track the parent’s lifetime gift tax exclusion and keep a tally of total life time gifts.
The IRS recently stated that the annual gift tax exclusion for tax year 2019 will stay at $15,000 for individuals and $30,000 for married couples filing jointly. However, the lifetime gift tax exclusion will increase to $11.4 million.
The IRS does not tax certain gift transfers of either cash or property, regardless of amount. These gifts are gifts to a spouse, charitable or nonprofit organizations, or when the funds pay tuition or medical expenses on behalf of another.
When you pay for someone’s tuition or medical bills, send those payments directly to the institution to avoid these payments to be considered gifts. If you send it to the student or patient first, there will be some extra paperwork or it may also be counted and reduce one’s lifetime gift tax exclusion. If a gift creates an actual tax bill, the person responsible for paying it would be the person who gave the gift, not the recipient.
Ways to avoid the reportable taxable gifts, include certain types of grantor trusts, and leveraging the 529 exclusions for students’ expenses. These can be effective, such as investing in a 529 college savings plan. By creating a 529 plan, one can make a lump sum $75,000 contribution which represents 5 years of tax expenses total free transfer.
The current gift tax rate is the same as estate tax, which can be 18% to 40%. You can make a lump sum contribution toward a 529 plan up to five times the annual gift tax exclusion, while avoiding a gift tax, as long as they make a special election. The special election means parents can ask the IRS to treat this contribution, as if they made it evenly throughout a five-year period.
In a slightly different situation, if you have recently received an inheritance from a parent, then you need to find out if you have an inheritance tax bill. An estate planning attorney will be able to help you with this.
If you wish to provide significant gifts to family or other individuals you should also meet with an estate planning attorney at our firm to create a strategic plan to organize your gifts to be effective and minimize tax liabilities. This should be a central part of an estate plan for families.