Just as gifts come in all shapes and sizes, so do the tax rules and regulations regarding the gifts of your assets that you make during your lifetime or at death. Generally speaking, the donor of the gift is responsible for paying any gift taxes owed.
The Internal Revenue Service (IRS) first states that any gift is a taxable gift, but then applies exceptions to that general rule.
Generally, the following are not taxable gifts:
- gifts to your spouse regardless of the amount
- gifts to persons other than your spouse that don’t exceed the annual exclusion, currently $14,000 (see below)
- gifts of tuition payments or medical expenses that you pay for anyone, so long as you make the payments directly to the providers of those services
- gifts to a political organization
(Charitable gifts have some tax advantages, also, but tax rules related to charitable gifts are not addressed in this blog.)
Annual Exclusion Gifts: You can currently give up to $14,000 per year to as many persons as you want without triggering a gift tax or a gift reporting requirement to the Internal Revenue Service. If you are married, both spouses can gift $14,000 for a total of $28,000 each year to as many persons as they want.
529 College Plan Gifts: Your contribution to a 529 College Plan for your child is a gift which grows tax-free. The parent is the account owner, and the beneficiary is your child. The money can typically also be withdrawn tax-free if it is used to pay for college or certain other type of schools. You can set up a separate 529 College Plan for each child that you want to benefit. Contributions qualify for the $14,000 annual exclusion.
UTMA Account Gifts: Under Minnesota’ Uniform Transfers to Minors Act (UTMA) the child for whom the account was established owns the money but you are the custodian of the account. That child has control over the account as soon as he or she reaches age 21. These accounts are not limited to education purposes. Contributions qualify for the $14,000 annual exclusion.
Estate Tax Exclusion: The current (2016) exclusion from federal estate taxes is $5,450,000, and that exclusion amount is indexed for inflation. Although it’s often referred to as the “estate tax exclusion” it applies to assets that you’ve given to others during your lifetime or at death.
The IRS keeps track of how much you’ve given away during your lifetime by requiring you to file Form 709 each year that you exceed the current annual $14,000 gift exclusion.
If you die having given away during your lifetime or at death assets above the estate tax exclusion of $5,450,000, those additional assets will be taxed at federal tax rates up to 40%. Most Americans are not in any danger of exceeding the $5,450,000 exclusion.
Estate planning lawyers like me strive to understand gift and tax basics so as to assist clients with their estate planning needs. However, for the final word on questions involving gifts and taxes, certified public accounts and other tax professionals are the best sources of information.
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