Many people give to charity to reduce their taxes. However, giving gifts to loved ones can have the same effect. In keeping with the old saying that charity begins at home, some people choose to give money to family members in addition to their charitable giving. This money can then be used to increase family wealth, either by paying off debt, investing in a new business, or simply helping the recipients lead a more comfortable and prosperous life. However, there are limits to how much a generous relative can give without leaving their lucky relatives saddled with a sizable gift tax.
The 2017 Gift Tax Explained
Although tax laws are changing every year, the amount you can give to a relative without paying gift taxes has remained stagnant. The amount is currently set at $14,000. This law has loopholes, however, which allow gifts to be multiplied. The tax-free giving limit of $14,000 is per giver and even per individual recipient. Thus, a wealthy couple can each give $14,000 to their son and daughter-in-law, leading to a tax free total transfer of $56,000 per year between the two households. If there are children, they also can be gifted $14,000 from each grandparent.
These gift tax rules may seem restrictive at first glance. However, they can allow sizable transfers of wealth between households when used to their fullest allowed extent. In addition, putting money in a grandchild’s 529 college account or preparing a trust fund for them does not count toward the maximum gift tax. You also can make gifts by paying medical, dental, and educational expenses without any limits or gift taxes, as long as these are paid directly to the provider. There are many ways to help your loved ones without adding to their tax burden.
Estate Gift Taxes
This situation becomes more complicated when people are planning to leave an inheritance to their children. The limits on inheritance without taxes are currently $5.49 million per person. As with gift tax limits, this can be compounded by both members of a couple leaving $5.49 million per person to their heirs. It is important to involve an accountant in planning estates, as the federal taxes begin at 40% once you hit the $5.5 million threshold and continue rising from there. The $5.49 million tax-free limit also applies to trusts left to heirs.
Many couples use gift laws to reduce their estate to a smaller, less taxable size. The $14,000 annual limit can quickly spend down an inheritance, leaving less of your estate subject to taxes and more cash in the pockets of your heirs.
The Portability Provision
The portability provision is one of the most important ways that people can be harmed by not understanding the ins and outs of estate tax law. This must be chosen on the estate tax return of the first spouse of a couple to die, even if the estate owes no taxes. Electing for portability means that the first spouse to die can posthumously leave $5.49 million each to your heirs tax-free in addition to the money that the second spouse leaves. This in effect doubles the amount of tax exclusion that heirs receive, escaping the 40% estate tax. In families with a great deal of assets to be passed down, this can lead to millions in savings.
A Simple Guide to Claiming Gifts
Although recipients are entitled to receive money tax free, major monetary gifts must be claimed on taxes. People who make gifts over $600 are required to report these funds on a Form 1099 of their return. Recipients also will need to claim the gift on their return. Although the IRS may not take a chunk of gifts, they still want to be aware of major sums of money changing hands. This is another case where consulting a CPA can save a great deal of time, stress, and even money. The IRS is aware that the gift laws are lenient and can easily be abused. As a result, even a single number out of place can attract negative attention from agents.
Many people assume that their days of playing Santa Claus are over when children grow up. However, you can still surprise loved ones with financial gifts. This is a great way of reducing your own tax liability while giving children and other beneficiaries the greatest present of all: financial stability. While the IRS places limits on this gift giving, it remains one of the best ways of keeping money in the family.
