Gift Taxes: What are they really?
Gift Taxes. What are they really?
Gift Tax rules often throw people for a loop. What are they? Am I really going to pay taxes for giving to my kids? What’s the limit? How does it impact me? Let’s go through these types of questions on a general level. If there are still questions at the end, it’s probably a good idea to either set up a separate appointment, or bring it up in your next personal review.
Now, to understand the gift tax, we need to first understand Estate Taxes.
When someone passes, your estate should be totaled up. Real estate, investment accounts, bank accounts, etc. This value is your Estate. This value is possibly subject to Estate Taxes.
Estate Tax rules have changed many times over the years. And that was a major change in the most recent tax changes by the Trump Administration in December of 2017.
Previously, individuals had an exemption of $5,490,000 ($10,980,000 for married couples). So, if your estate was smaller than the exemption, there would be no estate tax assessed on assets before being transferred to beneficiaries. Under the new tax law, the federal estate exemption for an individual is increased to $11,200,000 ($22,400,000 for married couples). These exemptions will be indexed to inflation each year until 2025. In 2026, the exemption will revert back to its 2017 levels, and then will adjust for inflation moving forward.
One strategy some use to lower their estate value is to gift some of their assets to their children over time. If they gift some of their assets away while they are alive, that means there is less of a taxable estate upon their demise. That’s where the gift tax exclusions come in.
Gift Tax Exclusion:
Under current law, any gift given to an individual above the gift limit per year will count against your overall estate exemption. In 2018, the gift tax exemption is raised to $15,000 / giftee. So if you give $100,000 to someone in one year that will lower your estate exemption by $85,000. Now remember, there is a limit on how much someone can give to another individual a year, but not how many individuals you give to.
For a married couple, that means that each of you could give $15,000 (total $30,000) to an unlimited number of people. Let’s say a married couple has four children. One spouse could give $15,000 to each, and the other can do the same $15,000 to each (making it a total of $120,000 / year).
Any amount given above the $15,000 in a year to another individual should be reported to your CPA. Again, there is no impact on income taxes, but it does need to be kept track of over the years.
Estate Tax doesn’t necessarily apply to everyone, but it has potential to apply to more than many realize. The Estate Exemption is something that has changed frequently over the years. Just 20 years ago, the estate exemption was just $625,000 for an individual (1998). In 2010, it was an unlimited exemption. So with that type of volatility, it should be something discussed periodically.