At first glance, the gift tax can appear more restrictive than it is in practice.
First, the burden of the gift tax, if any, is on the gift giver and not the receiver of the gift. In other words, giving gifts does not cause the recipient to pay the gift tax.
One aspect of the gift tax than many may have heard of is the annual gift tax exclusion. For 2019, the gift tax exclusion is $15,000 per recipient per year. This means a person could give $13,000 per person per year to each of their children, grandchildren, nieces, and nephews for the rest of their life without ever triggering the gift tax.
However, for married couples, this exemption is even more generous since married couples can combine their annual exemptions. This allows married couples to gift up to $30,000 per year per recipient without triggering the gift tax.
Even if individuals give gifts to a recipient that exceed that annual exclusion in a given year, that does not necessarily mean that the gift tax must be paid. Even above and beyond the annual exclusion, there are a couple of exemptions for medical and educational expenses. However, in order for the exemption to apply, the gift has to go directly to a qualified educational institution or medical provider. Please meet with a tax attorney, or CPA, before attempting to utilize this exemption.
Even if no exclusion or exemption applies, a person will still likely not need to pay the gift tax because on top of the annual exclusion is the very high lifetime gift and estate tax exclusion. The individual lifetime exclusion is, as of 2019, over $11 million. In other words, if a person’s lifetime gifts and remaining estate are under $11 million, there should be no gift or estate tax liability.
To apply this exemption to any gifts that exceed the annual exemption in a given year, individuals will have to file a federal gift tax return with the IRS. Please see an experienced tax professional to make sure the necessary paperwork is filed correctly. There are also penalties for failure to file a gift tax return up to 25% of the tax owed, however, since no gift tax is likely to be owed, the penalty will likely be a flat fine.
Given the high gift tax threshold, gift giving can be a powerful tool for helping relatives with special needs or an individual’s potential nursing home expenses.
To see how gift giving can play a role in your estate planning and/or assistance of relatives with special needs, please call Martha C. Brown & Associates at (314) 962-0186.