As calendar year 2014 comes to a close I find some people think about making gifts to children or other family members before year-end. Reasons for wanting to make these gifts vary widely including reducing future estate taxes; shifting income to a lower income tax bracket taxpayers; or the simple desire to transfer a particular asset to a particular person such as a child.
You may think that giving away your assets shouldn’t include interference from the government. After all, it is your property, and you should be able to do with it as you please. There was a time in our history when this was the case. The result was deathbed gifts of all one’s property in order to avoid estate taxes. After all, we as Americans are quite ingenious at learning how to avoid taxes. But newer laws have changed the nature of the game, and you must follow the new rules if you’re going to successfully minimize your taxes. The rules for annual gifting are as follows:
- In any calendar year you are allowed to give away up to $14,000 per person to as many people as you desire without triggering any gift taxes. The gifts can be in cash or property. This $14,000 annual exclusion is indexed annually for inflation. If the gift is a gift of property or other hard-to-value asset, you must get an appraisal of the value (meaning, you can’t just guess!).
- If you are married, you may give away up to $28,000 per year to as many people as you desire. This assumes that your spouse consents to make the gifts with you. This is called a “split gift.” Again, this amount will be adjusted for inflation annually.
- Your gift must be a gift of a present interest versus a gift of a future interest. For example, assume that you deeded your 25-year-old son a piece of land, but the deed said he would not receive title until his thirtieth birthday. This would be considered a gift of a futureinterest and would not be eligible for the annual gift tax exclusion.
- Gifts to spouses who are U.S. citizens are unlimited.
- Annual gifts are a ‘use it or lose it’ proposition. If you don’t use your $14,000 exclusion this year, you can’t carry it over to next year.
If your gift results in a gift tax, you, not the receiver of the gift, are responsible for paying the tax. The gift tax return and the taxes on gifts in excess of the annual gift tax exclusion can be handled in one of two ways. You can pay the tax on the gift on or before the time your income tax return is due (April 15 of the following tax year or later if you file an extension), or you can use a portion of your lifetime applicable exclusion amount for any federal gift tax due. Federal tax law allows you to give to whomever you wish, either during your lifetime or at your death, an amount equal to the lifetime applicable exclusion amount ($5,340,000 for singles; $10,680,000 for couples in 2014, indexed for inflation) free of federal estate taxes.
For gifts in excess of the annual exclusion amount or gifts that use a portion of your lifetime applicable exclusion amount, you’ll need to file a gift tax return.
The preceding is a modified excerpt from my recently released book (as co-author), “J.K. Lasser’s New Rules for Estate, Retirement, and Tax Planning, 5th Edition”, John Wiley & Sons, Inc., publisher.