Forbes’ recent article, “Why The Gift Tax Matters So Much to You,” reminds us that certain wealth transfers are excluded from gift taxes. You can currently give $14,000 per year or $28,000 per year as a couple to an individual or separately to as many individuals as you wish without paying taxes on any of the gifts. In addition, the recipient doesn’t owe any taxes on the gift received. But what some folks don’t understand is this: the $14,000 limit applies to filing a gift tax return—not the total amount you can give each year.
In addition to the $14,000 annual exclusion, there’s also a lifetime exemption from gift taxes—now at $5.45 million (or $10.9 million per couple). That means you can make total gifts of up to $5.45 million before you have to pay gift taxes. Any remaining exemption can be used as an exemption from estate taxes when needed.
The reason to file a Form 709, Gift Tax Return, is for you and the IRS to have an accounting of the amount of your lifetime exemption you’ve used. Plus, some gifts are also not considered taxable—like gifts of up to $14,000 to as many different people as you want, charitable gifts, gifts for education expenses and gifts for medical expenses.
While you are at it, you can make contributions to a Section 529 tuition plan and exclude up to the annual $14,000 limit, or you can give up to $70,000 in one year and use up five years’ worth of the exclusion. But if you do this, you can’t make another gift to that individual for the next four years.
Remember: if you want to help someone with tuition fees or medical bills, send the money directly to the institution or party that provided those services—such as the college or hospital. Don’t give the gift to the friend or relative you want to help, or the gift will be deemed taxable income.
Make sure that you get advice from a qualified estate planning attorney.
Reference: Forbes (July 17, 2016) “Why The Gift Tax Matters So Much to You”