Q. I’m confused by your column last week. I thought the most you could gift each of your children was $14,000 a year. We’d like to help our children and their spouses get into a house and out of their depressing apartment sooner than later, but they all live in an expensive part of the country, and it will take a few years of gifting $14,000 to provide them with a decent down payment. Are we allowed to gift more, and if so, do we or they have to pay tax on any amount over $14,000?
A. Staying within the $14,000 gifting limit of present interest (meaning the recipient can immediately use the gift) property or cash to any one individual is the simplest approach to gifting. The current “annual exclusion” amount is $14,000; any amount above this counts against your exclusion from gift or estate tax. Anybody can gift to anyone; it doesn’t have to be a child or a relative. If the present interest gift value is $14,000 or less in a calendar year, there is no reporting requirement, and there are no tax issues for either the donor or recipient. Regardless of the value of the gift, the recipient is not responsible for any tax on the gift unless the donor’s cost basis of the gift is less than the value of the gift. If this is the case, as discussed last week, the recipient may owe long- or short-term capital gains tax when the property gifted is sold.
If you are married, you can “gift split” and jointly give away as much as $28,000 to an individual. So, if you and your spouse want to gift to your child and to their spouse, you could gift $28,000 to each or a total of $56,000 to the couple in one year gift-tax free and remain under the annual exclusion. With that said, a married couple may have to file a gift-tax return if they combine their annual exclusions to gift-split. This may be avoided if the spouses write separate checks from their individual accounts or from their joint account. A tax professional can help you determine whether you or your spouse needs to file a gift-tax return to make what’s called a gift-split election.
Currently, the federal gift and estate tax exclusion is $5.34 million (sometimes referred to as the unified credit or lifetime gift tax exemption). If your gifts exceed the annual exclusion, you must file a gift-tax return. If these gift amounts exceed $5.34 million, you could end up owing gift tax of up to 40 percent on those amounts. Even if your gifts over the annual exclusion don’t exceed $5.34 million, they will reduce the amount you can pass estate-tax-free upon your death. The gift-tax return allows the IRS to know how much of the $5.34 million tax-free lifetime exemption amount you have used prior to death. IRS form 709 is used when filing a gift-tax return. Gift-tax returns must be kept indefinitely since the lifetime exclusion from gift tax and any gift tax paid is cumulative, and your heirs will need them to calculate tax, if any, on your estate.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624