Certain gifts are excluded from income tax, but you need to know the specifics to make this work for you and your estate plan.
Did you know that you can give $14,000 per year (or $28,000 per year as a couple) to an individual or separately to as many individuals you want and do not have to pay taxes on any of the gifts? According to an article in Forbes, “Why The Gift Tax Matters So Much to You,” the recipient will not owe any taxes on the gift received either. This is just one part of the gift tax system, which can be a very useful part of estate planning when done correctly.
In addition to the $14,000 annual exclusion, there’s also a lifetime exemption from gift taxes—now at $5.45 million (or $10.9 million per couple). That means you can make total gifts of up to $5.45 million before you have to pay gift taxes. Any remaining exemption can be used as an exemption from estate taxes when needed.
The reason to file a Form 709, Gift Tax Return, is for you and the IRS to have an accounting of the amount of your lifetime exemption you’ve used. Plus, some gifts are also not considered taxable—like gifts of up to $14,000 to as many different people as you want, charitable gifts, gifts for education expenses and gifts for medical expenses.
While you are at it, you can make contributions to a Section 529 tuition plan and exclude up to the annual $14,000 limit, or you can give up to $70,000 in one year and use up five years’ worth of the exclusion. But if you do this, you can’t make another gift to that individual for the next four years.
Here is an important detail: if you want to give a college student help with tuition fees or help someone with medical bills, you need to send the money directly to the college or to the facility or company that provided medical services (hospital, nursing home, etc.). This sort of gift should not be given directly to the person that you want to help, or the gift will be treated as taxable income.
Giving with warm hands is a rewarding experience for the giver and the recipient. Speak with your estate planning attorney to be sure that your gifts work in concert with the rest of your estate plan.
Reference: Forbes (July 17, 2016) “Why The Gift Tax Matters So Much to You”