Tax Consequences of Gifting Money

Steven A. Lone

The Gift Tax Exemption Explained.

The IRS collects taxes on estates valued at $11.4 million or more per individual. Gift taxes exist to ensure that estates can’t evade taxes by giving money away to reduce or eliminate the estate tax bill. You can, however, use annual and lifetime gift tax exemptions to legally reduce your estate.

Gifts to certain recipients are not taxable. You can give an unlimited amount to your spouse tax-free. Also non-taxable are gifts to pay medical or tuition expenses for someone else. Additionally, gifts to a political organization are tax-free, and donations to qualified charities are deductible from the value of the gift. Finally, you don’t pay taxes on gifts that are less than the annual gift tax exclusion. 

Understanding the annual gift tax exclusion. Each year you can give up a set amount (currently $15,000) per gift recipient in cash or assets without triggering gift tax. This annual exclusion is per person, meaning married couples can exclude $30,000. The donor, not recipient, is responsible for any gift tax. Giving more than the excluded amount requires you fill our IRS Form 709 but doesn’t necessarily trigger any current taxes.

Understanding the lifetime gift tax exclusion. The reason that excess annual gifts don’t trigger immediate gift taxes is the lifetime gift tax exemption, currently $11.4 million per individual. Whenever you give more than the annual excluded amount, you subtract the excess from your lifetime exemption amount. It’s only after you’ve exhausted the lifetime gift tax exemption that you face estate taxes when you pass away. 

Factors that affect your gift tax. When a spouse dies, the deceased’s $11.4 million federal lifetime estate tax exclusion transfers to the surviving spouse. When the second spouse dies, the combined estate tax exclusion is $22.8 million. When giving to a recipient’s Section 529 Education Plan, you have the option of giving up to five times the annual exclusion amount in one year without triggering gift tax reporting. You average the gift over five years, agreeing not to make any additional gifts to the recipient’s 529 plan during the five-year period. 

Gifting and estate planning go hand in hand. Gifting to individuals and trusts can help preserve your inter-generational wealth while minimizing your tax obligations. This can help you leave more of your estate to your beneficiaries and less to Uncle Sam. 

This information is not intended to be a substitute for specific, individualized tax or legal advice. This material was prepared by LPL MOD and does not necessarily represent the views of the presenting parties or affiliates. This information has been derived from sources believed to be accurate. Please note that investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information is should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any federal tax penalty. All indices are unmanaged are not illustrative of any particular investment.