Gift tax: Keys to understanding who pays what

Many people are confused by the gift tax rules as set forth by the IRS. What exactly is “gift tax” and who pays this tax? The giver or the one who receives the gift? When must a gift tax return be filed? ElderLawAnswers writers have answered these questions, and more, in an article “Will You Owe a Gift Tax This Year?” (https://www.elderlawanswers.com/will-youowe-a-gift-tax-this-year-6069).

Gift tax is paid by the donor (the giver) when a gift is made to a donee (the receiver). However, very few people actually pay gift tax since the lifetime exemption in 2019 is $11.4 million; an individual must have given away more than $11.4 million in the past. Anyone can give away up to $15,000 each annually to any number of persons without paying any gift tax, the annual exclusion. A husband and wife can give $30,000 away as a couple. For instance, a married couple could give a married child $60,000 each calendar year ($30,000 to the child and $30,000 to the child’s spouse) and avoid any gift tax on that money. If that same couple gave $40,000 to their child and $40,000 to their child’s spouse in a given year, then the parents have exceeded the annual exclusion amount by $20,000 and should file a gift tax return (Form 709). This is for reporting purposes since it is unlikely that the lifetime gift tax exemption threshold ($11.4 million) would have been reached. Note that if more than the annual exclusion is given to a certain individual by both spouses, the spouses must file separate IRS Forms 709.

The annual exclusion ($15,000) can be used long term to reduce one’s estate if so desired. A married couple can give $15,000 each to a child and the child’s spouse (totaling $60,000) each year for 25 years and they would have given away $1.5 million without paying any gift tax. They would not have needed to report these gifts, or have them count against the lifetime exemption.

There are other ways that gifts do not need to be reported for gift tax purposes. A gift can be given to pay for someone else’s medical care or education, and not just to colleges but to nursery schools, private elementary and high schools. The money must be paid directly to the school, university or healthcare provider to be exempted. Pre-payments can be made as soon as the person is admitted to the school. However, contributions to someone else’s 529 education savings plan are limited to the $15,000 annual exclusion rule. A special section of the tax code allows a donor to aggregate up to five years’ worth of annual exclusions and gift $75,000 (in 2019) to a 529 plan at one time.

Another reason to file a gift tax return is if you give property other than money, such as stock, away and it is worth more than $15,000 in value as of the date that you gave it away. You should inform the person to whom you are giving the stock to that they are assuming your “basis” which is what you paid for it. The basis is used upon sale to determine the profit or loss.

Note that the above scenarios describe the IRS rules. These rules do not exempt gifts made five years before entering a long term care facility and applying for Medical Assistance.

If you have questions regarding your estate planning, contact the attorneys are OWM Law at 610-323-2800 or through our website at www.owmlaw.com.

The legal advice in this column is general in nature, Consult your attorney for advice to fit your particular situation. Kathleen Martin, Esquire is licensed to practice in the Commonwealth of Pennsylvania and is certified as an Elder Law Attorney by the National Elder Law Foundation as authorized by the Pennsylvania Supreme Court. She is a principal of the law firm of O’Donnell, Weiss & Mattei, P.C., 41 High Street, Pottstown, and 347 Bridge Street, Phoenixville,610-323-2800, www. owmlaw.com. You can reach Mrs. Martin at kmartin@owmlaw.com

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