Newburg Staff Writers-February 15, 2021 (9:00 AM)

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, gifts may be subject to additional compliance or tax implications depending on the situation. Below are some of the exceptions where gifts are not subject to tax:

  1. Gifts that are not more than the annual exclusion for the calendar year (see below for limits)
  2. Tuition or medical expenses you pay for someone directly to the institution (the educational and medical exclusions)
  3. Gifts to your spouse
  4. Gifts to charitable organizations
  5. Gifts to a political organization for its use

For 2020/2021, the annual gift exclusion remains at $15,000. This essentially means that the first $15,000 of gifts in present interest to each done 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 done for purposes of the annual exclusion. A taxpayer can give away $15,000 to as many individuals as he or she wishes. Spouses can each make $15,000 in gifts annually to respective children, grandchildren, friends, etc. By way of example, a couple could make $15,000 gifts to each of their four grandchildren, for a total of $120,000. These annual exclusion gifts do not count towards the lifetime gift exemption (explained further below).

If you gave gifts to someone in 2020 totaling more than $15,000, reporting must be completed via Form 709 (US Gift Tax Return) and is due by April 15th of the following year.

Barring a change by the new administration, for 2021 the estate and gift tax exemption is $11.7 million per individual ($11.58 million for 2020), up from $11.18 million in 2019. This means an individual can leave $11.7 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield $23.4 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.

The top federal estate tax statutory rate remains at 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. Adjusted Federal taxable lifetime gifts are considered 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 0.8% 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 CPA 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.

Please contact us should you have any questions.