Many people aren’t aware of the fact that, in most situations, there really isno gift tax. Here’s why…
$14,000 Annual Exclusion
The federal government gives each of us an allowance to gift anybody$14,000 per year without incurring any gift tax. This $14,000/yearreplenishes every year, and it’s $14,000 per person. So, theoretically, Icould gift every person that I know $14,000 today, and then another$14,000 next year and the year after, and there would be NO gift tax.
$5,490,000 Lifetime Exclusion
What most people don’t realize, is that there’s a second allowance of $5.49mm! In other words, let’s saythat I want to give you $114,000. That’s $100,000 more than what I can give you out of my $14,000annual bucket. That’s not a problem at all, because I also have the $5,490,000 bucket. The $5.49mmbucket is called my “Lifetime Exclusion.” If I use any of it during my lifetime, I simply reduce my estate taxexclusion by that amount.So in our example, if I gift you $114,000, I would take $14,000 out of my annual bucket and $100,000 outof my lifetime bucket. My annual bucket replenishes each year. But my lifetime bucket does NOTreplenish. In fact, I must reduce my lifetime bucket by $100,000, so now my lifetime exclusion is “only”$5.39mm instead of $5.49mm.Now, if my estate is less than $5.39mm, this wouldnot be a problem at all, because my heirs wouldhave no estate tax anyhow. However, if my estate ismore than $5.39mm, than my heirs would have topay estate taxes on anything inherited above$5.39mm. In other words, the lifetime exclusionbucket is used for both gift and estate tax purposes.So every time I use it to not pay gift taxes, I’m alsoreducing my estate tax exclusion… that’s how andwhy the gift tax and the estate tax are related to oneanother.
No Relationship Required
You don’t have to be related to use either of these buckets. You can gift $14,000/year to a completestranger and you would have no gift tax. You can also gift money to a complete stranger using yourlifetime exclusion bucket, and you would have no gift tax.
$10,980,000 Total Exclusion for Married Couples
One thing to keep in mind about the lifetimeexclusion bucket is that the amount changes eachyear. In 2016, the exclusion was $5,450,000. In2017, the exclusion is $5,490,000. Also, keep inmind that I can “port” over my $5.49mm to myspouse if I’m married. So technically, a marriedcouple could have a total joint exclusion of$10,980,000! Therefore, if you are married andyour net worth is less than $10,980,000, there isabsolutely no reason whatsoever for you toconcern yourself with the gift tax. That’s becauseeven if you gift your entire net worth during yourlifetime, you would pay $0 in gift taxes and yourheirs would pay $0 in estate taxes. That’s why the gift tax is really a non-issue for most people!
No Gift Tax to the Recipient
Now, everything we just talked about applies to the person GIVING the gift. What about the personRECEIVING the gift? Well, here’s some more good news: there is no tax to the gift recipient.
What Paperwork is Required?
If you’re using the $14,000 annual bucket, the gift doesn’t need to be reported to the IRS if you follow theproper procedures. However, if you’re using the $5,490,000 lifetime bucket, you would need to file a gifttax return with the IRS (even though no gift tax would be due). This is done to simply notify the IRS thatyou’re using part of your gift / estate tax exclusion.Also, make sure the the checks are written from the specific individuals who are giving the gift. In otherwords, if mom is gifting you $14,000, and dad is also gifting you $14,000, you’ll need two separatechecks: one from mom and one from dad. We might also have to “source” these funds from a mortgageunderwriting standpoint. Please check with me before you do anything so that we can discuss thespecific details of your situation and make sure this is all done properly. Contact me using the info belowso we can get started!
PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY ANDDOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAXADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OFTHESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 559. ALSO, THIS ARTICLE REFERENCES THEFEDERAL GIFT TAX. YOUR STATE GIFT TAX LAWS MAY BE DIFFERENT.
Christine MaherPresidential Mortgage Groupchristine.email@example.com(215) 262-93536 Neshaminy Interplex, Suite 205,Trevose, Pennsylvania 19053