If you are a successful business owner, you might be in a position to give gifts of cash, securities or other assets. Before you give, make sure you and your recipients know the tax implications of giving and receiving.
To understand the tax implications of gifting, it is important to understand how gift taxes are related to estate tax laws. At a basic level, here’s how the two are related. Most people want to maximize the amount their heirs will inherit and minimize the amount of tax their estate owes upon their death. Giving away one’s assets prior to death reduces the amount of tax the estate will owe. To prevent people from giving away everything and avoiding taxation, the IRS has put limits on gifts. If the value of gifts exceeds the limit, then the giver will owe taxes on the amount that exceeds the limit.
As you consider gifts and giving, you’ll want to know about exclusions, limits and special considerations.
This is the maximum annual amount that an individual can give to any number of recipients to avoid paying a gift tax. Taxpayers can give up to $14,000 in 2014. For example a taxpayer can give each child up to $14,000. The gift can be in the form of cash, property or a combination. If the total of all of your gifts to each individual is not over the $14,000 limit, then there is no gift tax return filing requirement. The taxpayer cannot deduct the gifts, and the gifts are not taxable to the recipients.
In addition to the annual exclusion described above, taxpayers can use a portion of the federal estate tax exemption to offset an additional amount during their lifetime without gift tax consequences. For 2014, the credit-equivalent lifetime gift tax exemption is $5.34 million.
If you make a gift to any individual in excess of $14,000 during the year, a gift tax return filing for the year is required even if there is no tax due. The filing is used by the IRS to track your federal estate tax exemption reduction as a result of gifts against the lifetime limit, and includes the tax if you exceed the current lifetime limit.
Education and Medical Exclusion
Specific education and medical expenses paid are excluded from the gift tax.
- Tuition expenses paid to a qualifying educational organization.
- Medical expenses paid directly to providers including payment for medical insurance.
If you are married and both are in agreement, gifts to recipients made during a year can be split between spouses, even if the cash or property gift was made by only one spouse. Using this technique a married couple can give up to $28,000 a year to each recipient under the annual limitation previously discussed.
If you are considering the giving of gifts this year, believe that you have a gift tax filing requirement or have additional questions about a gifting strategy, please contact me.