It may seem incomprehensible but making a gift out of the kindness of your heart may leave you on the hook for taxes. The IRS expects people who transfer things of value to friends or loved ones to also pay taxes even when you receive no consideration in return.
Before dubbing the IRS the “Scrooge” of gift giving, keep in mind that without some standard many transactions could be recorded as gifts. But the federal government also recognizes that things such as land, homes, stock investments and other assets can be gifts in the truest sense, even though they may have high dollar values. That’s why there are certain short- and long-term tax exemptions in place.
What Qualifies as a Gift?
The IRS takes a similar approach to define a “gift” as the common birthday present. It was purchased by one person and transferred to another with no strings attached. In other words, the recipient is under no obligation to pay the donor back or perform a duty.
Like the birthday gift, the recipient takes immediate possession and control. That’s important to understand in terms of more complex asset transfers. The federal government would generally not allow something to be considered tax-exempt if it involved a future transfer. In other words, you wouldn’t be able to gift a home and portion out the value at $15,000 annually to stay under the limit. But there are avenues you can utilize to gift wealth over time and stay under the annual cap.
Gifts and Trusts
There are a variety of trusts that can be established to provide annual benefits under the annual $15,000 limit. For example, a minor’s trust can have a single beneficiary and provide that person with an annual tax-exempt amount under the gift exclusion. Although this type of irrevocable trust generally gives the beneficiary full control over the assets at age 21, its value tends to be that sums exceeding the annual limit can be easily moved and doled out over time.
Gifts that May Enjoy Unlimited Tax Exemption
In the IRS’ eyes, any gift can be counted. That might seem unreasonable in terms of modest birthday and holiday gifts. Fortunately, the federal government is pragmatic about excluding certain ones. These types may enjoy an unlimited annual exemption.
- Tuition and other educational expenses paid on another person’s behalf.
- Medical expenses for another person.
- Gifts made to a spouse.
Gifts made to charitable organizations.
The federal government sets an annual limit before taxes on many others. The threshold for 2014-2017 was $14,000 and that number increased to $15,000 in 2018. Married couples may also give away items they co-own and the limit doubles. Jointly owned gifts for 2014-2017 would enjoy a limit of $28,000 and $30,000 for 2018.
In addition to these annual limits, the IRS provides a lifetime maximum. That figure was set at $5.45 million in 2016 and $5.49 million in 2017. The recent Tax Cuts and Jobs Act boosted the lifetime limit to $11.18 million in 2018 and $11.4 million in 2019.
It’s important to keep in mind that gifts you make above the annual limit may simply be deducted from your lifetime exemption. If you are uncertain about how gifts made over the course of your life have impacted your ability to make non-taxable asset transfers, speak with an experienced tax and estate planning attorney.
Gifts between Spouses have a Wrinkle
It generally holds true that gifts between spouses are exempt under the federal guidelines. The importance of married couples ability to move property to each other is widely known as unlimited because couples share the wealth.
But the federal government does place a high limit on gifts made to spouses who are not U.S. citizens. Gifts made to non-citizen spouses enjoy a special annual exemption of $152,000 for 2018. Anything above that would be subject to taxation or deduction from your lifetime limit.
If you are thinking about making a substantial gift, it’s important to work with an experienced tax and estate planning law firm. Contact the France Law Firm.