The annual gift tax exclusion is one of the most misunderstood financial concepts in the financial world. Changes in estate tax laws on both the federal and state level have only made gifting more difficult to understand. From how much you can gift in 2018 to whether a gift is considered taxable, we are going to clear up some of the misconceptions about gifting.
Despite recent changes to estate tax law, gifting remains an effective way for many taxpayers to transfer wealth. While some restrictions may apply, gifting generally allows the donor to remove assets from their estate before they pass away. This can be particularly powerful when it comes to assets that are expected to appreciate significantly over time or as a strategy to ensure that they remain below estate tax thresholds. In addition, gifting can also provide a mechanism to transfer assets to family members who might be in a lower tax bracket or for taxpayers that may prefer to gift during their lifetime because of the personal satisfaction gained by watching beneficiaries enjoy their gift today.
First, let’s review the basics. For the first time in 5 years, the annual gift exclusion has increased to $15,000 per person for 2018. Married couples have the ability to combine their gifts, also known as “gift splitting,” which would allow for up to $30,000 to be gifted to each recipient. Gift splitting requires a gift tax return be filed to confirm that both spouses agreed to split the gift. Consider reviewing form 709 for additional information. In addition to federal rules, you must also be cognizant of state rules that apply to gifting.
Taxpayers often incorrectly assume that they are only able to gift $15,000 per person per year without triggering taxes to the donor or the donee. This has become one of the most common misconceptions. Robert Munoz, Esq, a Partner and estate planning attorney at Davison Eastman, Muñoz, Lederman & Paone, P. A. notes, “Many clients are confused by the annual exemption as compared to the lifetime exclusion and it is important have a clear understanding of each.” It is possible for additional gifts to be made above the $15,000 threshold without triggering any taxes. It is possible for additional gifts to be made above the $15,000 threshold without triggering any taxes. That’s right – you can give more.
Keep in mind, federal gift tax is generally owed only when the cumulative gifts above the lifetime gift tax exemption are made. The good news is that this amount has doubled in 2018 to $11.2 million per person or $22.4 million per married couple. As a result, taxpayers with estates less than the thresholds noted could actually gift all of their assets without ever subjecting themselves or the recipient with paying any gift taxes. For those with cumulative gifts greater than $11.2 for individuals or $22.4 million for married couples, gift taxes may apply and they are generally paid by the donor, not by the recipient. It may be possible to have the recipient pay any gift tax. Despite the additional flexibility, gifts in excess of the annual exclusion should only be made after consulting with a tax or estate planning attorney.
Gifting that doesn’t count toward annual exclusion
Interestingly, there are a few circumstances where gifts can be made in excess of $15,000 without counting against your lifetime gift exemption. These apply to gifts from one spouse to the other spouse, gifts to a qualified charitable organization, gifts made directly to a health care provider for medical reasons, and gifts made directly to an educational institution for a student’s tuition. (Directly is the key word here.) When leveraged properly, these options can provide a great opportunity for excess gifts that are tax free and will not impact your lifetime gift exemption.
Finally, there is a special election that can be made that pertains to education savings through a 529 plan. For 2018, up to $75,000 ($150,000 for married couples) can be contributed at one time to a 529 plan by accelerating five years' worth of contributions as gifts. ($15,000 x 2 spouses = $30,000 x 5 years = $150,000). Utilizing this election can help parents and grandparents fund a large portion of education expenses in a tax advantaged way.
Assets you may not want to gift
While gifting can be an effective estate planning strategy, it is important to be careful when gifting highly appreciated assets. Gifting generally transfers the cost basis from the owner to the recipient. This would result in the loss of the step up in cost basis at death. Passing an asset at death rather than gifting during your life can result in the step up in cost basis rule applying which essentially extinguishes capital gains when assets are inherited. Keep in mind, this information is not intended to be a substitute for specific individualized tax advice. Since everyone’s situation is unique, consider speaking to your tax, legal and financial adviser to determine the most appropriate strategy for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.