Gift-Giving and Gift Taxes
By Cowles Liipfert
Many people are unfamiliar with gift taxes. Here are some of the basics:
If you receive a gift you don’t owe tax, and you don’t have to report the gift as income.
The recipient of a gift doesn’t owe gift tax or income tax and does not have a reporting requirement. Gift taxes are the responsibility of the donor. Except for the ones to charitable organizations, gifts are not deductible by the donor.
Not all gifts are required to be reported, and even fewer actually result in a gift tax liability.
Gifts that are always exempt from taxation include gifts to IRS-recognized charities, gifts to spouses (if they are US citizens), gifts to political organizations, and gifts to pay a person’s education tuition or medical expenses (but only if paid directly to the educational institution or medical facility – not to the individual).
There is an annual gift tax exclusion that eliminates many other gifts from taxation.
Gifts that don’t fall into one of the previous exempt categories and don’t exceed the annual exclusion are not subject to gift tax. For 2019, taxpayers may give up to $15,000 per donee without gift tax consequences and without any reporting requirements.
Gift-splitting allows a married couple to combine their exclusions so that in 2019, they may give up to $30,000 to each donee.
Lifetime Exclusion – Unified Tax Credit
Gifts in excess of the annual exclusion should be reported annually on a gift tax return. But they probably will still not result in a gift tax liability because of the unified credit. Every taxpayer is permitted a lifetime amount which they may give in the way of taxable gifts before any gift taxes apply. Taxable gifts are deducted from the unified credit. Upon the death of the taxpayer, the assets remaining in the estate are taxable if they exceed the unified credit remaining after the deduction of all taxable lifetime gifts. The unified credit amount for 2019 is $11.4 million.
Beware of situations that inadvertently result in reportable gifts.
Gifts include more than just cash transfers. If you loan money to someone either interest-free or at a below-market rate, you’ve created a gift. If you forgive debt, that’s a gift. Are you helping support an adult child? If you pay a bill of any kind (with the exception of direct payment of educational and medical payments mentioned above), those amounts need to be included when determining whether your annual gifts have exceeded the per-person annual exclusion. Transfers of property of all kinds are gifts. Remember: when applying the annual exclusion to a recipient’s gifts, you must include ALL gifts whether cash, property or otherwise.