As 2019 ends, many people considering giving financial gifts to friends and family members. While you should always seek the advice of your tax professional, here is a basic overview to help you with your gift giving.
What Is a Gift?
The IRS defines a gift as anything you give for which you do not receive “full consideration” in return. It’s a gift if the beneficiary of your generosity doesn’t also give you something of equal fair market value or money.
For tax year 2019, each person may give up to $15,000 per year to as many individuals he or she desires without incurring a gift tax and without using any of their gift tax exemption. Married couples can combine their gift tax exclusion and jointly give up to $30,000 per year to as many individuals as they wish. This exemption provides an extraordinary way to transfer wealth tax free.
For example, a husband and wife could gift $30,000 to their adult son or daughter. If that adult son or daughter has a legal spouse, the husband and wife could also gift another $30,000 to the son or daughter’s spouse.
Timing could also increase the impact of your gifts. Since the gift tax exclusion is based on tax years, you could give a gift in December and another gift in January without exceeding the $15,000 threshold since these are two separate tax years. Keep in mind in this scenario you would not be able to give a gift to the same recipient in the following December, assuming you gifted the full $15,000 in January.
Gifts that exceed the $15,000 annual sum can still be given; however, you will need to file a gift tax return with your personal tax return. It is important to realize that that your lifetime gift tax exemption will be reduced accordingly.
Lifetime Gift Tax Exemption
The lifetime gift tax exemption is the total amount you give away tax-free over the course of your entire lifetime. It’s a collective cap rather than by person or by year. This lifetime exemption is in addition to the annual gift tax exemption discussed earlier.
The American Taxpayer Act of 2013 (ATRA) indexed the lifetime exemption for inflation, so it adjusts accordingly each year. It is important to understand this lifetime gift tax exemption is shared with the U.S. Federal Estate Tax, so your lifetime gifts reduce the amount of exemption you have left to later shield your estate from taxation if you choose to apply it to your lifetime gifts over the exclusion amount. In other words, the federal estate tax and the gift tax share the same lifetime exemption.
The exemption amount in 2019 is $11.4 million for individuals and $22.8 million for married couples. These amounts will increase each year with inflation, as mentioned earlier, until 2025. On January 1, 2026, the exemption amounts are scheduled to revert 2017 levels ($5.49 million for individuals; $10.98 million for married couples) unless Congress renews the legislation.
Many people find tax exemptions difficult to understand. We understand and offer a free, no obligation consultation to explain how we can maximize the transfer of your wealth and avoid taxation when possible. Please call our office at 314-727-0163 to speak with an attorney directly and start getting answers.