Helpful miscellaneous articles regarding
our retirement plan and planning. Like
you, I review my retirement nestegg and plan from time to time. Recently, I went though some continued
education for some credentials I maintain and it occurred to me that we all
could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
The
Below Review on Changes to Gifting to Kids and Grandkids:
Gift Tax
Limits: How Much Can You Gift?
A gift tax is
imposed by the IRS if you transfer money or property to another person without
receiving at least equal value in return. This could apply to parents giving
money to their children, the gifting of property such as a house or a car, or
any other transfer.
Whether or not the tax applies is dependent on a few factors, primarily the value
of the gift. If the amount stays below the gift tax exclusion, you won’t have
to worry about any tax. There are both annual and lifetime exemption amounts.
The annual gift tax exclusion for 2019 is $15,000, and the lifetime exclusion
is $11.4 million.
What Is the Gift Tax?
The IRS defines a gift as “any
transfer to an individual, either directly or indirectly, where full
consideration is not received in return.” In other words, if you write a big
check, gift some investments or give a car to someone other than your spouse or
dependent, you have made a gift. The IRS has a gift tax limit, both for the
amount you can give each year and for what you can give over the course of your
life. If you go over those limits, you will have to pay a tax on the amount of
gifts that are over the limit. This tax is the gift tax.
In almost every case, the donor
is responsible for paying gift tax, not the recipient. A recipient will only
pay gift tax in special circumstances where he or she has elected to pay it
through an agreement with the donor. Even though recipients don’t face any
immediate tax consequences, they can face capital gains tax if they sell gifted
property down the line.
There are two numbers to keep
in mind as you think about gift tax: the annual gift tax exclusion and the
lifetime gift tax exemption.
The Annual Gift Tax Exclusion
The annual gift tax exclusion
is $15,000 for the 2019 tax year. (It was the same for the 2018 tax year.) This
is the amount of money that you can give as a gift to one person, in any given
year, without having to pay any gift tax. You never have to pay taxes on gifts
that are equal to or less than the annual exclusion limit. So you don’t need to
worry about paying the gift tax on, say, a sweater you bought your nephew for
Christmas.
The annual gift exclusion limit
applies on a per-recipient basis. This gift tax limit isn’t a cap on the total
sum of all your gifts for the year. You can make individual $15,000 gifts to as
many people as you want. You just cannot gift any one recipient more than
$15,000 within one year. If you’re married, you and your spouse can each gift
up to $15,000 to any one recipient.
If you gift more than the
exclusion to a recipient, you will need to file tax forms to disclose those
gifts to the IRS. You may also have to pay taxes on it. If that’s the case, the
tax rates range from 18% up to 40%. However, you won’t have to pay any taxes as
long as you haven’t hit the lifetime gift tax exemption.
The Lifetime Gift Tax Exemption
Most taxpayers won’t ever pay
gift tax because the IRS allows you to gift up to $11.4 million over your
lifetime without having to pay gift tax. This is the lifetime gift tax
exemption, and it’s $200,000 higher than it was in 2018.
So let’s say that in 2019 you
gift $215,000 to your friend. This gift is $200,000 over the annual gift
exclusion. That means you will need to report it to the IRS. However, you won’t
immediately have to pay tax on that gift. Instead, the IRS deducts that
$200,000 from your lifetime gift tax exemption. Assuming you have never made
any other gifts over the annual exemption, your remaining lifetime exemption is
now $11.2 million ($11.4 million minus $200,000).
Most taxpayers will not reach
the gift tax limit of $11.4 million over their lifetimes. However, the lifetime
gift tax exemption becomes important again when you die and pass on an estate.
The Gift Tax & The Estate Tax
The federal
government will collect estate tax if your estate has a
value of more than the federal estate tax exemption. The exemption for 2019 is
$11.4 million. At the same time, the exemption for your estate may not be the
full $11.4 million. You can only exempt your estate up to the amount of your
remaining lifetime gift tax exemption. So let’s say that you have lowered your lifetime
exemption down to $10 million by making $1.4 million in taxable gifts. The
federal government would then tax any estate that you pass on to someone for
all value over $10 million. In other words, the gift tax and estate tax have a
single combined exclusion. Regardless of whether the gift passed to the
recipient before or after your death, it applies toward that same $11.4 million
limit.
Tax rates on the estate tax go
up to 40% just as with the gift tax.
All of this means that one way
to prevent taxation of any assets you pass on is to gift those assets in
increments of $15,000 or less. This could take some planning on your part but
it is completely legal. There are also some gifts that you never have to pay
tax on.
What Gifts Are Safe From Tax?
Taxable gifts can include cash,
checks, property and even interest-free loans. It also applies to anything you
sell below fair market value. For instance, if you sell your home to your
non-dependent child for $175,000 when it’s worth $250,000, the $75,000 difference
could be considered a gift. That surpasses the annual gift tax limit and thus
is deducted from your lifetime gift tax limit.
What constitutes a gift that
counts toward your gift tax limit is generally easy to understand. There are
several things that the IRS doesn’t consider a gift, however. You can give
unlimited gifts in these categories without facing a gift tax or having to file
gift tax paperwork:
- Anything
given to a spouse who is a U.S. citizen
- Anything
given to a dependent
- Charitable
donations
- Political
donations
- Funds
paid directly to educational institutions on behalf of someone else
- Funds
paid directly to medical service or health insurance providers on behalf
of someone else
There are, of course, a few
exceptions to keep in mind. If your spouse is not a U.S. citizen, you can only
give him or her $152,000 each year. Anything above that is subject to gift tax
and counts against your lifetime limit.
Funds that cover educational
expenses refer only to tuition. That does not include books, dorms or meal
plans. You can skirt the gift tax by contributing to someone’s 529 college savings plan with a lump sum and then spreading it over five years for
tax purposes. The IRS allows taxpayers to donate $75,000 into a 529 plan
without paying tax or reducing the $11.4 million lifetime limit. The only
caveat is that any additional gifts for the same recipient will count toward
your lifetime limit.
Lastly, it’s important to note
that charitable donations are not only exempt from gift tax, they may also be
eligible as an itemized deduction on your individual income tax return.
How to Pay Gift Tax
The first step to paying gift
tax is reporting your gift. Complete IRS Form 709, United States Gift (and
Generation-Skipping Transfer) Tax Return, on or before your tax
filing deadline. Download the document,
complete each relevant line and sign and date along the bottom. You then send
the form in with the rest of your tax return.
You should complete Form 709
anytime you gift in excess of $15,000 – even if you’re within the $11.4 million
lifetime limit. You’ll have to file a Form 709 each year you give a
reportable gift, and each form should list all reportable gifts made during the
calendar year.
If you live in Connecticut, you may also have to
file a state gift tax return. It is the only state that has its own gift tax as
of 2019. In most cases, you can file a gift tax return on your own. If your
transfers are large or complicated, consider finding a financial professional. CPAs and tax attorneys should be comfortable and confident
with gift tax limits, rules and paperwork.
The Bottom Line
The IRS allows
every taxpayer is gift up to $15,000 to an individual recipient in one year.
There is no limit to the number of recipients you can give a gift to. There is
also a lifetime exemption of $11.4 million. Even if you gift someone more than
$15,000 in one year, you will not have to pay any gift taxes unless you go over
that lifetime gift tax limit. You will still need to report gifts over the
annual exclusion to the IRS via Form 709. The IRS will lower your remaining
lifetime exclusion over time and then use that amount to determine how much of
your estate you need to pay estate tax on.
Tips for Getting Through Tax Season
- If
you’re gifting large enough amounts that you’re flirting with the gift
tax, then you should probably be working with a financial advisor who can
manage and invest your wealth. If you don’t already have an advisor, you
can find one today with SmartAsset’s free advisor
matching tool. Simply answer a few questions about your
financial situation and goals, and the program will pair you with up to
three financial advisors in your area.
- Any
charitable donations that you make are tax deductible. As you plan for
your taxes, it’s important to keep track of your potential deductions
throughout the year. They could save you money if you make deductions
worth more than the standard
deduction.
- One
way to maximize your deductions is to use the right tax filing service.
Two of the best filing services, H&R
Block and TurboTax, both offer
tools to help you maximize your deductions. And while both services are
easy-to-use, certain taxpayers may prefer one over the other. Here’s a
breakdown of H&R
Block vs. TurboTax to help you decide which is best
for you.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Full post disclaimer in left column. PCN Home Page is located at: http://pcn.homestead.com/home01.html
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