Gift taxes: You can give more than you think

One of the least understood aspects of U.S. tax law is the gift tax. Countless Americans with a healthy net worth are under the illusion they can only “gift” up to $14,000 a year to individuals without incurring a tax liability.

Not true. You can give away up to $5.49 million (as of 2017) over your lifetime without owing a penny in taxes. Given this lifetime exclusion, it’s clear that you could give away up to that amount at any time you feel like it, including all in one year!

The widespread misunderstanding results from the fact that the $14,000 annual exclusion (which applies per individual gift recipient) is the amount you can give away without reporting it on IRS Form 709, Gift Tax Return. Any gift amounts above $14,000 must be reported to the IRS, which will then keep track over your lifetime. If the amount of gifts exceeding the annual $14,000 ever adds up to more than the lifetime exemption (which goes up with inflation), only then would you be hit with a gift tax up to 40 percent.

Here is an example: You give your daughter $40,000 to buy a car. Since that’s more than $14,000, you have to file Form 709, reporting the gift to the IRS with the taxable portion at $26,000. However, you do not have to pay any taxes on that $26,000, unless you’ve already exceeded the lifetime exclusion, which currently stands at $5.49 million. Basically you are telling the IRS that you have used $26,000 of your lifetime exemption.

Few people will ever actually have to pay gift taxes. The purpose behind the tax is to prevent wealthy individuals from avoiding estate taxes by giving all their money away to family members before they die.

One reason the gift tax is so poorly understood is that the relevant IRS publications are not easy to understand. IRS regulations concerning gift and estate taxes are complex, and it’s a good idea to consult a professional financial planner who will include tax planning when helping you craft your retirement plan. Here are some basics:

• The gift tax applies to the transfer of property by one individual to another with no expectation of receiving full value in return.

• The giver must pay gift taxes if they ever come due. Gift recipients do not owe any taxes.

• The $14,000 reporting exclusion applies per individual gift recipient, meaning you could give up to $14,000 (or $28,000 per couple) each year to as many people as you would like, without having to report any of the gifts to the IRS.

• There are several exceptions to gift tax rules, and the following gifts are not subject to the gift tax, even if they exceed the annual and lifetime exemption amounts: Gifts to your spouse, tuition or medical expenses paid directly to the institution on someone else’s behalf, gifts to a political organization, and gifts to qualifying charitable organizations.

• You cannot deduct gift amounts from your income tax, except for charitable gifts.

• Transfers above $1 million (bequest, gift or inheritance) that benefit children and grandchildren may be subject to the separate generation-skipping transfer tax, a topic for another column!