It’s the one-size-fits-all holiday gift: money. When thinking about ideas for the holiday season, a financial gift is something to consider. While many investors look to gift a portion of their estate to help their estate-tax bottom line down the road, the idea is not only for the wealthy. Many folks want to make a substantial gift to their loved ones so they can watch them enjoy it. If you’re thinking about gifting money this year or in the future, here are some things to consider:
What is Considered a Gift?
According to the IRS “You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.” Keep in mind that if you can claim you child as a dependent, anything you give them does not constitute a gift.
Annual Gifting Limits
The annual exclusion for 2015 is $14,000 (and will remain $14,000 in 2016) – that means a taxpayer can give up to $14,000 per person per year without being taxed on the gift. If a couple makes a gift from their joint property, they are both entitled to the annual exclusion of $14,000 – together they can give $28,000 per person.
The Connection Between Gift Tax & Estate Tax
What happens if you give someone more than the annual gift tax exclusion amount? While you would have to file a gift tax return, that doesn’t mean you’ll owe gift tax. Here’s why…
While gifts made in your lifetime will reduce the amount of your taxable estate, gifts given in excess of the annual exclusion will reduce your estate tax exemption. The federal estate tax exemption for 2015 is $5.43 million, (this amount increases to $5.45 million in 2016: Forbes) meaning you can leave that amount to relatives or friends free of any federal tax. If you’re married, your spouse is entitled to a separate $5.43 million exemption. Here’s how it works:
Let’s say you and your spouse gift your son $50,000 so he can put a down payment on his first home. You would need to file a gift tax return, showing an excess gift of $22,000 ($50,000 – $28,000 exclusion = $22,000). The taxable gifts made in 2015 would reduce your estate tax exemption by $22,000 to $5,408,000 ($5,430,000- $22,000). Each year, any amount over the annual exclusion a person gives other people accumulates until it reaches the lifetime gift tax exclusion.
Currently, a taxpayer does not pay gift tax until they have given away over $5.43 million in their lifetime (2015).
The Special 529 Rule
Contributions to a 529 plan are considered present interest gifts and qualify under the gift tax exclusion. However, there is a special rule for 529 plans that allow you to put up to five years of annual exclusion gifts ($70,000 for individual gift/$140,000 for joint gifts) in a plan all at once by making a special election to treat the gift as if it were made evenly over a five-year period. The caveat? You cannot make any other gifts to that child over that 5-year period without using part of your 5.43 million exemption.
Gifts That Don’t Count
Some transfers of money are never considered to be gifts, no matter how much they are. When considering the gift tax, it’s not a gift if:
- If it is given to a husband or wife who is a U.S. citizen. (there are special rules that apply to spouses who are not U.S. citizens)
- It’s paid directly to an educational or medical institution for someone’s medical bills or tuition expenses. (It doesn’t have to be a child, or even a relative, for this exception.)
Considering a Gift in 2015?
If you’re considering gifting money to a loved one this year, talk to your accountant. If you’re in need of a referral to a good CPA, contact us and we’ll be happy to help!