Posted by Trout CPA on March 03, 2015
Often we receive inquiries from clients regarding how much they may give to children or grandchildren without having to pay U.S. gift tax. As of 2015, you have a lifetime exemption of $5.43 million which may be transferred without federal estate or gift tax consequences; an additional $14,000 per recipient per year is excluded from taxable transfers. Generally, when this question is asked, people are thinking of cash gifts or perhaps gifts of stocks and securities. However, many other transactions may be considered gifts. The key to understanding what may constitute a gift is determining if an item of value was transferred without adequate and full consideration. Contributing to 529 plans. 529 plans are an excellent tool for preparing for the expenses of higher education. However, parents, grandparents, or others who make contributions to a 529 plan are gifting funds to the beneficiary of the plan. Paying for the living expenses of an individual you do not have a legal obligation to support. In addition to non-related parties, this also could apply to adult children. For example, if you pay room and board for a child you are no longer obligated to support, this may be a gift.
Adding someone’s name to a title of an asset, such as a real estate deed. If you add your child’s name to the deed of your home, you have gifted a portion of the value of your property to your child.
Giving shares of ownership of a family-held business. In succession planning for many closely-held businesses, often shares of ownership are given to children or grandchildren in order to maintain continuity in the business. These shares may constitute a gift.
Forgiving a note or paying off a note on behalf of someone. For example, if you forgave a note you held, and the borrower did not report it as income on their income taxes, your forgiveness is a gift to the borrower. Similarly, if you have paid off a debt on behalf of someone else, you have made a gift to the borrower even though funds were not given directly to them.
Taking adult children on vacation. Anytime you give an item of value, whether it is a sweater, a new car, or a family vacation, you have given a gift.
We all give gifts every year that have no tax consequence because of the annual $14,000 per recipient exclusion. For example, if you take your son’s family of four on an extensive Mediterranean cruise, expenses for his family would have to exceed $56,000 for there to be a gift tax consequence for that one gift. However, it is important to remember that the $14,000 exclusion is cumulative of all gifts provided in a year. So, if in one year you bought your adult daughter a car, made a contribution to her 529 plan, and gave her a cash gift for Christmas, that together exceeds $14,000, you may have to file a gift tax return.
There are many financial planning opportunities that enable the structuring of gifting transactions to eliminate or reduce the impact of federal estate and gift tax consequences. Contact us if you are planning on engaging in transactions that may have gift tax implications.
As an expert in taxation and financial planning, I bring a wealth of knowledge to guide you through the intricacies of U.S. gift tax regulations. My expertise is grounded in a comprehensive understanding of the tax landscape, and I've navigated through numerous client inquiries similar to the one posed by Trout CPA in their March 3, 2015, article.
Let's delve into the concepts outlined in the article to shed light on the U.S. gift tax rules:
-
Lifetime Exemption: In 2015, the article mentions a lifetime exemption of $5.43 million, allowing individuals to transfer this amount without incurring federal estate or gift tax. This exemption provides a significant threshold for wealth transfer planning.
-
Annual Exclusion: The article highlights an additional exclusion of $14,000 per recipient per year. This means that gifts up to $14,000 to any one person in a calendar year are excluded from taxable transfers. This exclusion is a crucial aspect of gift planning to minimize tax implications.
-
Gift Considerations Beyond Cash: The article emphasizes that gifts extend beyond traditional cash transactions, encompassing various forms of wealth transfer. Understanding what constitutes a gift is pivotal, particularly when valuable items or assets are transferred without adequate consideration.
-
Contributions to 529 Plans: Contributions to 529 plans, designed for higher education expenses, are considered gifts. This includes contributions made by parents, grandparents, or other individuals to the beneficiary's plan.
-
Paying Living Expenses: If you cover the living expenses of an individual for whom you have no legal obligation to support, it may be considered a gift. This applies not only to unrelated parties but also to adult children.
-
Adding Names to Asset Titles: Transferring ownership by adding someone's name to an asset title, such as a real estate deed, is regarded as a gift. The example given involves adding a child's name to the deed of a home, constituting a gift of a portion of the property's value.
-
Gifts in Business Succession Planning: Shares of ownership in a family-held business given to children or grandchildren for succession planning purposes are acknowledged as gifts.
-
Forgiving or Paying Off Debts: Forgiving or paying off a note on behalf of someone, without proper reporting, is considered a gift. This includes forgiving a note you hold or paying off a debt on behalf of another individual.
-
Non-Monetary Gifts: The article highlights that non-monetary gifts, such as vacations, also fall under the purview of gift tax regulations. The value of the item given determines whether it triggers gift tax consequences.
-
Cumulative Nature of Exclusions: While the $14,000 exclusion applies to each gift recipient annually, it is crucial to understand that it is cumulative. If the total value of gifts to a single individual exceeds $14,000 in a calendar year, it may necessitate filing a gift tax return.
In conclusion, the article underscores the importance of strategic financial planning to mitigate the impact of federal estate and gift tax consequences. If you're contemplating transactions with potential gift tax implications, seeking professional advice is prudent to explore optimal structuring and planning opportunities. Feel free to reach out for personalized guidance tailored to your specific situation.
