As we head toward the holiday gift-giving season, some taxpayers also consider giving gifts of cash or securities to their family members. Who doesn’t like receiving a cash gift at year-end from the grandparents? Taxpayers can transfer substantial amounts to their children and others TAX-FREE through the use of the annual federal gift tax exclusion. The amount is adjusted for inflation annually. For 2019, the annual exclusion is $15,000.
The exclusion covers gifts that you make to each person each year. Therefore, if you have three children, you can transfer a total of $45,000 to them this year (and next year) free of federal gift taxes. If the only gifts made during the year are excluded in this way, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below). The tax reporting for taxable gifts is solely on the donor (i.e., the giver) and not the recipient of the gift.
What counts as a gift?
Gifts include any transfer (money or property) to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in exchange. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule.
Generally, the following gifts are not taxable gifts.
- Gifts that are not more than the annual exclusion for the calendar year.
- Tuition or medical expenses you pay for someone (the educational and medical exclusions).
- Gifts to your spouse.
- Gifts to a political organization for its use.
Note: this discussion isn’t relevant to gifts made from one spouse to the other spouse, because these gifts are gift tax-free under separate marital deduction rules.
Gifts by married taxpayers
If you’re married, gifts to individuals made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given to an individual by only one of you. By “gift-splitting,” up to $30,000 a year can be transferred to each person by a married couple because two annual exclusions are available. For example, if you’re married with three children, you and your spouse can transfer a total of $90,000 each year to your children ($30,000 × 3). If your children are married, you can transfer $180,000 to your children and their spouses ($30,000 × 6).
If gift-splitting is involved, both spouses must consent to it. The spouse’s consent to gift split is actually made on the gift tax return. The gift tax return includes a spot for the consenting spouse’s signature.
“Unified” credit for taxable gifts
Even gifts that aren’t covered by the exclusion, and that are therefore taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11,400,000 (for 2019). However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death. The only time you actually pay any gift tax out of pocket is if you use up your entire lifetime exemption. That’s very rare, and only a small fraction of Americans ever have to pay any gift tax.
May I deduct gifts on my income tax return?
Making a gift or leaving your estate to your heirs does NOT ordinarily affect your federal income tax. You cannot deduct the value of gifts you make to friends and family members.
Annual gifts are only one way to transfer wealth to your loved ones. There may be other effective tax and estate planning tools. Contact your Wegner Tax Professional before year-end to discuss your options and also to document reportable gifts that may require a Gift Tax Return filing.