As we approach the end of the year, you may be thinking of making a large financial gift to your children, grandchildren or others in your life.
Gifting strategies and the tax laws that create them can be confusing. Even as I write this, Congress is considering major legislation that could impact generational gifting for millions of Americans in the future.
Don’t let these 5 myths about gifting assets stop your holiday giving this year.
Myth #1: You can only gift $10,000 per year. Years ago the IRS had limited financial gifts to $10,000 per year. These days, however, the annual gift limit (also known as the annual exclusion amount) is actually $14,000 per year. Next year it rises to $15,000.
Since the annual exclusion applies on a per-person basis, not only are you free to gift any individual up to $14,000 per year, but your spouse may do so as well.
For married couples, this effectively raises the annual gifting limit to $28,000 per gift recipient. If you have the resources to do so, you and your spouse may gift $28,000 per year to as many people as you like.
Myth #2: You will have to pay gift taxes. As long as you don’t exceed the annual exclusion amount of $14,000, gifting assets to others does not create a taxable event. Even if you do gift more than $14,000 to any one individual in a calendar year, it’s very unlikely that you will trigger a gift tax, now or in the future.
If you do make a large gift, any amount that exceeds the annual exclusion amount will be subtracted from your estate’s unified credit which is currently set at $5.49 million for single people or just under $11.0 million per married couple.
When you die the portion of your estate that exceeds your unified credit (less any gifts you made above the annual exclusion amount) may be taxable.
Note: Congress is currently considering legislation that would repeal the Federal estate tax completely. This, of course, would change everything.
Myth #3: Gifts that exceed the annual exclusion don’t require you to file anything with IRS. As noted above, gifts that exceed the annual exclusion amount won’t incur a direct tax. For 99.8% of American families, gifts that exceed the annual exclusion amount will have zero impact on their Federal estate tax.
However, gifts that do exceed that amount (currently $14,000 per year) will need to be reported on IRS form #709. When you die an estate tax return will be filed by the executor of your estate. The information on form 709 will be used to calculate the tax your estate may owe.
Myth #4: Charitable gifts are unlimited. True, you are free to give any amount to a qualified 501(c)3 non-profit organization. Doing so could lower your taxable estate by the amount of your gift, avoid capital gains taxes and reduce your taxable income for that year.
However, when it comes to the tax deduction on your Federal income taxes, the IRS says that you may not deduct an amount that is more than 50% of your Adjusted Gross Income (AGI). Well, you can, but the tax deduction is limited to no more than 50% of your AGI. Amounts that exceed that are carried forward into future tax years.
Payments made for college education or medical expenses are also exempt from the annual exclusion amount as long as they are made directly to the educational or medical institution. If your plan is to help out the grandkids with college expenses, it may be best to give directly to the school rather than the student if the gift exceeds $14,000.
Myth #5: Gifting appreciated assets like stock avoids the capital gains tax. Gifts of appreciated assets to charitable organizations do avoid the capital gains tax. Appreciated assets that pass to others after you die also avoid the capital gains tax.
However, when you gift appreciated assets like stock or mutual funds during your lifetime, the cost basis of those investments transfers over to the one who receives the gift. When they sell it, they are responsible for paying any capital gains taxes due on the sale of that asset. So, while the capital gains obligation may be transferred to the gift recipient, it is not actually eliminated.
Seek help when appropriate. Check with your financial advisor, estate planning attorney or tax professional before making any major changes to your estate plan or gifting strategies. In the meantime, click this direct link to the IRS website for the answers to the most frequently asked questions regarding gift taxes. For more information about the specific IRS rules regarding gift taxes and estate planning, download IRS publication 559.