It may seem counter-intuitive during the holiday season, but giving gifts to others may generate a tax issue. The IRS defines a gift as any transfer to an individual where nothing is received in return (the full definition can be found here). This transfer can be in the form of tangible personal property (stuff), real property (land or a house), or intangible personal property (cash, stocks, and bonds). Gifts can also be in the form of a charitable donation or a necessary expense. It is important to consider how the federal government assesses these gifts in terms of estate planning.
The total amount of a gift from a single individual to a single individual cannot exceed the annual gift tax exclusion for the current calendar year. For gifting in 2015, and in the upcoming New Year, this exclusion amount is $14,000. This means that a single individual can gift up to $14,000 to one person, without having to pay the federal “gift tax.” Spouses who choose to give jointly, a “split gift,” may give up to $28,000 to a person during the year without incurring a gift tax.
There are no limitations on a donor with regard to the number of people who can receive a gift in a single year. For example, if a parent has five children and five grandchildren, that parent/grandparent can present each child and grandchild with a gift worth up to $14,000 without having to incur the gift tax. In this scenario, there are ten individuals who can receive a substantial gift for a hefty total of $140,000 in a single calendar year. Over time, this can really add up!
Tuition or medical expenses paid directly for someone else are also not subject to the gift tax. These are called “qualified transfers.” As Forbes staff reporter Ashlea Ebeling notes in her article on the connection between gift tax and investments, a great qualified transfer is a 529 college savings plan.
Gifts given to a spouse, or gifts to a political organization for its own use, are not subject to the gift tax. Charitable contributions to qualified institutions, which are tax deductible, also do not prompt the gift tax.
The money and property that are gifted over the course of a lifetime decreases the value of an individual’s gross estate. Under current law, the exemption from federal estate tax is $5.43 million per person. Maryland has an estate tax exemption which is currently less than the federal exemption. Eventually, it will match the federal estate tax exemption in 2019, but this issue should be addressed when making planning decisions now. With this in mind, thoughtful gifting can reduce the likelihood that beneficiaries of an estate will pay taxes to the federal or state governments. As you make your decisions about giving at the close of the year, consider the gifting rules and how the rules may affect your planning.