‘Tis the Season

We’ve had a few clients ask about taxes on gifts.  Well, here’s the low-down.

A tax-payer can give up to $15,000 per year/per recipient (2018) without triggering gift tax.  The recipient can be family, non-family, adult or child.  Here’s an example: A person wants to give out some gifts to the following people; Daughter, son-in-law, three grandchildren, and mailman.  Each person can receive up to $15,000 without any tax effect to the giver or receiver.  That’s a total of $90,000.  This can be done in December of 2018 and then again to the same people in January 2019.  If the tax-payer is married, the spouse can give the same amount to the same people, thus doubling the potential gifts.

What if you want to give more than $15,000 to a recipient in one year?  Normally a gift in excess of the exemption ($15,000 in 2018) would trigger potential gift tax, HOWEVER, thankfully we have the Unified Credit.  What does this mean? When a person dies their estate can exclude a certain amount of their estate from estate tax.  In 2018 the estate tax exemption is $5.6 million per person (married couple would double this).  So, if a person dies in 2018, the first $5.6 million passes to the heirs without tax.  The nice thing about the Unified Credit is that if you give gifts during your life that exceed the annual exclusion, you can use your estate tax exemption.  Let’s take a look at an example.  Here’s a breakdown of gifts the tax-payer would like to make:
Family Members:             5 x $100,000 = $500,000 (exceeds gift tax exclusion by $425,000)
Mailman:                             1 x $15,000 = $15,000 (exceeds gift tax exclusion by $0)
When doing his taxes, the donor would claim $90,000 in gift tax exemptions AND $425,000 towards his estate tax exemption amount.  If when the giver dies the estate exemption was the current 2018 amount ($5.6 million), the executor of the executor of the estate would need to reduce the exemption by $425,000, thus allowing the estate to pass along $5,175,000 tax-free.