Gift giving is something that most people do each and every year. What some may not know is the gifts you give may be subject to tax. If you gift over a certain amount in a calendar year, those gifts could be subject to gift tax. Fortunately, there is a threshold for the amount of gifts given in a lifetime that are subject to taxation. The threshold is very high and most individuals will not be subject to any gift tax at all. There are also certain exclusions and deductions that can reduce the amount of taxable gifts, which further helps to stay under the lifetime gift tax exemption.
Gift Tax Exclusions
The federal estate and gift tax lifetime exemption is $5.49 million for 2017, increased from 2016 ($5.45 million) due to inflation. This means an individual can gift or leave to their heirs up to $5.49 million and pay no federal estate or gift tax. For married couples, the exclusion is doubled ($10.98 million). The exemption is large enough to cover lifetime gifts for most individuals, but if your estate is above that limit you may be subject to tax. To further help individuals stay under this lifetime gift threshold, there are certain exclusions and deductions. The annual per donee exclusion for 2016 and 2017 is $14,000. Therefore, you can gift up to $14,000 to any individual in a calendar year and it will be excluded from the lifetime exemption. You can make gifts up to $14,000 to as many different people as you like and these annual exclusion gifts won’t count towards the lifetime gift exemption. When determining your potential taxable gifts to an individual during a calendar year, you should take the total of all gifts given to that individual during the year and subtract the $14,000 annual exclusion. If you gifted greater than $14,000 to one individual the difference will be taken from your lifetime exemption. For example, if you gifted $20,000 to your sister and $10,000 to a friend during the calendar year, you would have a potential taxable gift of $6,000 ($20,000 gift to sister – $14,000 annual exclusion = $6,000 and $10,000 gift to friend – $14,000 annual exclusion = $0). This $6,000 taxable gift would be subtracted from your lifetime exemption. If you are married, you and your spouse can combine the annual exclusion, thus gifts made to each individual can be made up to $28,000 without being counted towards your lifetime exemption.
Gift tax and the annual exclusion limit apply whether you are making a gift to a stranger, friend, or your own children. However, any gift to your spouse is exempt from gift tax. Gift giving to your spouse qualifies for the marital deduction. Consequently, any gifts between you and your spouse will not impact the lifetime exemption.
There are also exclusions for gifts made for educational or medical purposes. If you make a payment directly to a qualified educational institution for the benefit of your children or grandchildren or anyone else, this “gift” would qualify as an exclusion from the lifetime exemption, and there is no limit on how much you gift. The same applies to payments made on behalf of someone else for medical expenses, if the payments are made directly to the medical care provider.
Gifts can also be made to certain organizations without any gift tax implications. In determining taxable gifts for a calendar year, a deduction is allowed for the amount of all gifts made to the United States government, any State government, or a corporation operated exclusively for religious, charitable, scientific, literary, or educational purposes.
In determining a taxable gift, the value of any gifted noncash property should also be analyzed. When gifting someone property that you own, the fair market value of the property at the time of the transfer is the amount that is considered the taxable gift. The $14,000 per donee annual exclusion rules apply to noncash gifts as well. When the donee receives the property, the adjusted basis of the property you owned becomes the basis for the donee.
A federal gift tax return (Form 709) needs to be filed if gifts to any individual in the calendar year exceed the annual exclusion of $14,000 and no exclusions apply. For instance, per the example above, the individual would be required to file a gift tax return for the $6,000 gift that was over the annual exclusion. It is important to note that only individuals can file a gift tax return. If a corporation or trust makes gifts, the filing requirement for that gift passes to the shareholder or beneficiary. Form 709 is due by April 15 of the year after the gift was made and a six-month extension is available. In addition, some states have gift tax filing requirements which vary from state to state.
If you believe you have made a taxable gift over the annual exclusion or would like more information on the taxability of gifts, please contact our office to discuss your situation and possible gift tax filing or planning needs.