Gift Taxes – Who pays on gifts above $14,000?

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Gift taxes is a subject that I get questions about on a fairly regular basis and the question itself implies some inaccurate information or misunderstanding around gift taxes.  It is generally posed by a parent trying to financially help one or more children or by a child concerned about finding an efficient method to transfer their parent’s wealth over the remainder of the parent’s lifetime.  Both of these scenarios require additional uncovering as there is more to unwind as to why the question is being asked. For this post, we will simply stick to the mechanics of gifting.

The Quick Answer

For the previous five years, the annual gift tax exclusion had been held at $14,000 and, in 2018, the IRS increased the annual gift tax exclusion to $15,000 per recipient.  The amount is inflation adjusted, however it can only be increased in $1,000 increments. The inflation rate has been low enough that it took five years for it to exceed the $1,000 increment.  This is generally the origination of the dollar amount cited in the question.

As for who pays the taxes, it is the giver of the gift that is generally responsible for any taxes due for the gift, not the receiver.  Under special circumstances, arrangements can be made for the receiver to pay any taxes due.

The Details of Gift Taxes

Now technically we have answered the question asked, but I’m not the type of person or in the type of relationship with the client to allow me to stop here.  Let’s dig just a little deeper to elaborate how taxes are applied to gifts in this context.

The annual gift tax exclusion allows any individual to gift up to the exclusion amount, $15,000 in 2018, per recipient, for both family and non-family members, for an unlimited number of recipients and have the gift be excluded from federal gift taxes.  For example, if you had two children and three grandchildren; you could gift a total of $75,000 (5 individual gifts of $15,000 each) amongst the five of them. If you were married, both you and your spouse could do this for a gift total of $150,000 (2 donors each giving 5 individual gifts of $15,000 each).  Taking this yet another step, if both of your children were married, both you and your spouse could gift a total of $210,000 (2 donors giving 7 individual gifts of $15,000 each).

This generally leads people to believe that they are limited to giving $15,000 per individual, which is not true.  The annual gift tax exclusion only allows the gift to be excluded from federal gift taxes and prevents them from having to file a gift tax return.  So then does that mean that if I give a gift above the annual gift tax exclusion amount that I will owe taxes? Not necessarily.

Any gifts that exceed the annual gift tax exclusion amount are considered for federal gift taxes and the lifetime estate and gift tax basic exclusion amount can be applied.  In 2017, the basic exclusion amount was $5,490,000 and for 2018, the Tax Cuts and Jobs Act increased the amount to $10,000,000 plus an inflation adjustment that, as of the writing of this article, has not yet been released.  If a gift exceeds the annual gift tax exclusion then it is applied to the lifetime basic exclusion amount and, until the lifetime basic exclusion amount is exceeded, no federal income taxes are owed on the gift. It would require a gift tax return to be filed as the lifetime basic exclusion amount used needs to be tracked and, as just happened in 2018, the lifetime basic exclusion amount can change over time.  Keep in mind that it can both be increased as well as decreased depending on whomever is creating the laws.

Disclaimer

As you are now being reminded, the IRS tax law can get complicated very quickly and everyone’s situation is unique.  So the standard disclaimer is required stating that you should contact your tax professional concerning your specific situation.

Photo by Mink Mingle

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