As we begin the last quarter of the year some taxpayers begin to question whether it would be smart to gift some of their estates to their children or others or to charities on the theory that it would leave less to be taxed on their death. They understand they have heard something about limiting gifting to $15,000 a year but do not understand what that means. Charities, of course, hold a different position since gifts to charity can reduce taxes now.
These questions obviously arise in cases where taxpayers have what they consider to be excess assets and not where there is need.
The first thing I do for such taxpayers is to assure the questioner that the government does not prohibit gifting in any amount and the limitation they are thinking of concerns whether or not a Gift Tax Return is expected to be filed by the following April 15. Filing a gift tax return does not necessarily mean that taxes are due and, in fact, because of the very high estate and gift tax exemption – in 2020 $11.58 million per person – it would be very rare that gift tax would be owed.
There can be tax issues relative to an idea called “basis” and there is something called the annual exclusionary gift that requires some explanation. Even there, that figure (currently $15,000) has less significance than it used to have.
So here is how it goes.
In 2020 the annual exclusionary gift is $15,000. If you give away up to but not more than $15,000 per person in a calendar year whether in cash or other property of value, then you definitely are not required to file a federal tax form known as a Form 709. More than that amount, you are expected technically to file a federal Form 709. Gifting does not have to be in cash. The taxpayer, by the way, for gift tax purposes is the person who gave the gift not the person receiving it. If you give more than $15,000 this does not mean necessarily that you are subject to Federal gift tax. In fact it is extremely unlikely that you are subject to gift tax even if you should file a gift tax return for reasons that are discussed here.
Additionally, it is extremely easy to give away more than the annual exclusionary gift without even technically being required to file a Form 709. Here is how.
You can give an unlimited amount to your spouse provided that your spouse is an American citizen. (There are different rules for non-citizens.)
Next, if you are married and want to benefit your son, for example, who is also married and has children, you and your spouse can give $15,000 each to your son (total $30,000) and also to your son’s spouse (another $30,000) and to each of your son’s children. If you want to compound the gifting you can simply repeat the gift for the following calendar year or years. Note, however, that this is just a description regarding gift tax. There can be reasons other than gift tax reasons to delay in gifting.
Before gifting, consider whether you will need the funds in the future. With people living longer and the high cost of care in assisted living, senior communities or nursing home care, you need to know you will have enough. Also, for capital gains tax purposes it is usually better for children and others to inherit highly appreciated assets which receive a step up in basis than to receive them directly.
After hearing all of these exclusions you might wonder if there are reasons to file a gift tax return at all. One reason might be to keep track of the value of the gift at the time it is given away. If the asset has increased in value since purchase both you and the party receiving it may need to keep track of its value as of the date of the gift – a concept known as basis. On resale this may be important to determine federal taxes regarding profit or loss.
For this as well as many matters, especially involving estates and taxes, be sure to check with a knowledgeable professional since every case is unique to its facts.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.