Those who make very large gifts during their lifetime may end up owing federal gift tax. But generally speaking, most ordinary gifts aren’t taxed. Only two states, Connecticut and Minnesota impose a state gift tax. Gift tax applies to gifts made during a person’s lifetime, while estate tax applies to the assets a person leaves to beneficiaries after their death. The theory behind gift tax is that estate taxes could potentially be completely circumvented by simply giving all assets away prior to death—assuming a person had some idea that death was imminent. Current federal laws allow each person to give away up to $5.43 million, either during their life or after their death, without owing gift or estate taxes.
If a gift happens to be taxable, it is the person making the gift, rather than the person receiving the gift, who must file a gift tax form, paying any taxes owed. Since there are few people who give away $5.3 million during their lifetime, it is generally not a huge consideration, however there are annual rules as well. A gift is considered anything you give away, receiving nothing in return—or receiving less than fair market value for in return. In other words, if your home’s fair market value is currently $280,000, but you sell the home to your daughter for $100,000, then you have essentially made a gift of $180,000 to your daughter. There are certain items which are not included under taxable gifts such as:
- You are allowed to give up to $14,000 during any calendar year to as many recipients as you choose;
- You are allowed to pay as much tuition as you like, for any person you choose, so long as it is paid directly to the college. (Books, supplies and living expenses for a college student do not qualify);
- You can pay as much for medical expenses as you like, for any person you choose, so long as the money is paid directly to the physician or hospital;
- You can give your spouse—so long as he or she is a U.S. citizen—as much as you like, and
- You can make gifts to political organizations tax-free, and you can give gifts to some charities, tax free.
Should you make a taxable gift—perhaps you gave your grandson $40,000 as a down payment for a home—then you will be required to file IRS Form 709, gift tax return. The recipient of a gift is required to report the gift as income tax. If you believe your estate might owe estate tax upon your death, one way to avoid this estate tax is to give away property during your lifetime. Couples can combine their annual exclusions, which means a couple is allowed to give away $28,000 worth of property, tax free, per year, per recipient. Tax-free gifts are based on the calendar year, so keep this in mind when giving tax-free gifts. You can also give real estate or stocks and bonds, tax-free, so long as the value is $14,000 or less.
If you are planning on giving gifts to minors, the minor must receive the property or money outright by the time he or she turns 21, however the property and income may be spent by or for the benefit of, a recipient who hasn’t turned 21. If letting go of your assets makes you feel vulnerable, then you should not do it. Instead, put your assets into a revocable living trust, and your heirs will be able to effectively avoid most estate taxes. If you have questions regarding tax-free gifts, speak to a knowledgeable Virginia estate attorney who can answer those questions and help you set up your estate in the most efficient manner possible.