A gift is any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return. The donor is generally responsible for reporting these gifts via an annual gift tax return (along with paying any tax should it apply).
Generally, any gift is a taxable gift. However, there are many exceptions to this rule. Usually, the following gifts are not taxable gifts:
- Gifts that are not more than the annual exclusion for the calendar year (see below for limits).
- Tuition or medical expenses you pay for someone directly to the institution (the educational and medical exclusions).
- Gifts to your spouse.
- Gifts to charitable organizations**
- Gifts to a political organization for its use.
**Gifts to qualifying charitable organizations are deductible from the value of the gift(s) made.
For 2016, the annual gift exclusion remains the same at $14,000 (2017 is currently at $14,000 as well). This essentially means that the first $14,000 of gifts in present interest to each donee during the calendar year is subtracted from total gifts in figuring the amount of taxable gifts. For a gift in trust, each beneficiary of the trust is treated as a separate donee for purposes of the annual exclusion. A taxpayer can give away $14,000 to as many individuals as he or she wishes. A husband and wife can each make $14,000 in gifts annually to respective children, grandchildren, friends, etc. By way of example, a couple could make $14,000 gifts to each of their four grandchildren, for a total of $112,000. The annual exclusion gifts do not count towards the lifetime gift exemption (below).
If you gave gifts to someone in 2016 totaling more than $14,000, reporting must be completed via Form 709 (US Gift Tax Return) and is due by April 15th of the following year (similar to your personal return).
For 2016, the estate and gift tax exemption is $5.45 million per individual ($5.49 million for 2017), up from $5.43 million in 2015. This means an individual can leave $5.45 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield $10.9 million from federal estate and gift taxes. Gifts made in excess of the annual gift exclusions throughout a person’s lifetime count against his or her estate tax exemption amount. The Federal estate and gift tax exemptions have increased significantly over the years due to various legislative changes and indexing for inflation.
This made the estate and gift exemption increase from $675,000 in 2001 to $1,000,000 in 2003, $2,000,000 in 2008 and ultimately, $5,450,000 in 2016. The top federal estate tax rate is 40%.
States often follow different rules within the estate and gift tax realm. For example, Massachusetts does not have a gift tax and instead has in place a $1 million filing threshold for estate tax purposes. While Massachusetts does not have its own gift tax, adjusted Federal taxable lifetime gifts are taken into account for purposes of determining whether the $1 million filing threshold has been met. Once the filing threshold has been met in Massachusetts, the full value of the estate is subject to Massachusetts estate tax applying tax rates from 1% to as high as 16%. Lifetime gifts can be an effective strategy to reducing Massachusetts estate tax and should be considered in conjunction with personal income tax planning.
There are many planning opportunities available to assure that you maximize the transfer of wealth to your chosen beneficiaries and minimize the amount of estate taxes paid at death. Gifting may be an important part of your overall estate plan. At Newburg & Company, LLP we provide our clients with comprehensive estate planning to protect their assets from unnecessary taxation and ensure their wishes are carried out in an organized and cost effective fashion.