Gifts and Taxes
Wednesday, 2 December 2015
by Brendan Bybee, JD MPA
As we grow from childhood into adulthood, the holidays become less about what we get and more about what we give. This tradition of ending the year on a generous note is an expression of our best selves and it can be intoxicating. We may find ourselves spending more than we planned when we stumble upon the “perfect thing” for someone close to us. It is true that the thought is what really matters, however, service to this principle often requires that we eschew too much scrutiny of price tags. Generosity is good for the soul and too much concern for prices can cheapen even the most expensive gifts. However, if you have been particularly generous this year, you may need to discuss the tax implications with your trusted advisors.
As with other transfers of property, the federal government imposes a tax on gifts (defined as any transfer for which you receive anything less than fair market value in return). The gift tax is levied on the cumulative value of gifts given by you to a particular individual in a given calendar year.
Most people are unaware of the gift tax but, then, most will never need to pay it. First of all, the first $14,000.00 (current through 2016 and subject to future adjustment for inflation) you gift to any individual is excluded from the tax. Secondly, direct payments for school tuition or medical care made on another’s behalf are exempt from the gift tax. Finally, each person can use their available estate tax exemption (currently $5.43 million and subject to adjustment annually for inflation) to cover any unpaid gift tax. It is possible, therefore, to be very generous without ever having a gift tax issue.
Gift tax returns (on IRS Form 709), like income taxes, are due annually but there is no penalty for failure to file on time if no gift tax is due. Under the circumstances, it may be tempting to disregard the gift tax and forgo preparation of a return until the need later appears. However, recording and reporting your significant gifts to the IRS is essential for simplifying administration of your estate and maximizing your ability to pass on wealth to your descendants for the following reasons:
1. The IRS has three years from the date of filing your gift tax return to assess your gift tax, whether the filing is timely or late. Although you can file at any time before the IRS initiates an assessment or collection proceeding, filing on time is advantageous because it starts the clock running against the IRS. It is important to be ahead of the IRS, especially if the value of the gift is subject to dispute (such as a gift of a partial interest in property). If you fail to take the lead, the IRS may do so after your death, complicating things for your loved ones.
2. If you intend to leave a family legacy, distributing your wealth to succeeding generations, you need to make the most of your Generation Skipping Transfer (GST) tax exemption (a topic we will address more fully in a future blog post). It is common to allocate GST exemption to annual gifts to irrevocable trusts. Unless the gift is subject to IRS automatic GST allocation, the value of your exemption will be determined at the time of filing your gift tax return. If the gift has since appreciated, you will have forever lost some portion of your exemption potential.
Taxes don’t have to spoil the fun of giving gifts and blessing others. If you are feeling generous this year, please sit down with us and we’ll help you make the most of your giving.
This information is made available by Spaulding Law for educational purposes only and not to provide legal advice. By using this website, you understand that there is no attorney-client relationship between you and Spaulding Law, unless you have entered into a separate representation agreement. This information should not be used as a substitute for competent legal advice from a licensed professional attorney.