For many, childhood birthdays connote memories of a reliable yearly windfall in the form of a check for $10 or $25 from grandma and grandpa. Such gifts perhaps represented a new video game or record album (for those who recall what those were), but they probably didn’t raise any tax concerns either for the child or grandparents.
But for parents who wish to make more substantial gifts to their children- and for anyone wanting to give a gift to anyone else – the tax implications should not be so easily dismissed. While most folks will not need to worry about paying the gift tax (though they may need to file a gift tax return), recent changes to the law regarding the taxation of gifts may play a role in decisions as to how much and when you should show your generosity.
What are the annual gift tax exclusion amounts?
Not every gift (like those $10 birthday checks) will be subject to tax or necessitate the filing of a gift tax return. As of 2018, individuals are permitted to give up to $15,000 in cash or assets each year to a child or other person without the IRS getting involved. That $15,000 annual exclusion is per recipient, meaning you can give up to $15,000 to each of your children every year no matter how many there may be without tax consequences. The cap is also per gifter, meaning mom and dad combined can give up to $30,000 to each child each year without filing a gift tax return.
The gift tax form
If your gifting exceeds these amounts in any given tax year, you must report the overage to the IRS by filing a Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return. But just because you have to file a gift tax return does NOT mean you will actually owe any taxes as a result of your gifting.
What are the lifetime gift tax exemptions?
All of these annual caps are accompanied by a lifetime cap on gifts. For 2018, the estate and gift tax exemption is $5.6 million per individual, up from $5.49 million in 2017. That means a married couple filing jointly will have an $11.2 million exemption from federal gift taxes.
Some Gifts are Not Gifts
There are two broad categories of gifts that are not considered gifts for tax purposes, meaning there are no exemptions, caps, or tax triggers that apply:
- Gifts given between a husband and wife who are both U.S. citizens
- Charitable donations
- Gifts paid directly to an educational or medical institution for another’s medical bills or tuition expenses
Planning Ahead: Gift Tax and Long-Term Tax Planning Strategy
Properly distributing benefits to your family calls for long-term planning and maximizing those benefits typically necessitates spreading your gifts over the span of several years.
A more rounded understanding of the gift tax can help you arrive at a stress-free (and tax-free) way to help your loved ones financially, even if it may not be quite as effortless as the yearly birthday checks you used to receive.
If you have questions or concerns about the gift tax or strategies for gifting to your children or others, please contact us. We welcome the opportunity to assist you.