A frequently asked estate planning question is, how much can you gift someone in one year?
The simple answer is you can give someone as much as you want. But you can’t give an unlimited amount without subjecting yourself to the federal gift tax.
Now, before we get into the nuts and bolts of the gift tax and how it works, you should understand that if you manage your affairs properly, you should never have to file a gift tax return or pay any gift tax. But the key to this is, you have to manage your affairs properly.
Let’s get to it…
What is the Gift Tax?
The gift tax is a federal tax that is applied to the transfer of assets from one person to another. Typically this tax is paid by the giver of the gift, (the “donor”). The recipient of the gift is known as the “donee”.
But here’s the deal with the gift tax. You are entitled to an annual “gift tax exclusion”. In other words, you can give up to a certain amount of money away each year without ever filing a gift tax return or paying any taxes on those gifts.
For 2017, the Federal Gift Tax Exclusion amount is $14,000. The exclusion has remained at this level since 2014.
What does this mean practically? How much can you gift someone?
You are probably wondering how much you can really gift someone in one year. I wasn’t lying when I said that you can give away as much as you want.
That’s because you can give away as many different gifts to as many different people as you want, without incurring any gift taxes.
Say you have three children. You can give away $42,000 (that’s $14,000 times 3) to your children without incurring any gift tax. In addition, your spouse can also give away an additional $42,000 to those same children!
Pretty cool, huh? So if you have a taxable estate, and you are trying to get it below the federal estate tax exemption amount (which is $5,490,000 for 2017), then a gifting program may be a good strategy to consider.
In essence, you can give $14,000 to as many people as you want without incurring any gift taxes or being required to file any gift tax returns.
What Happens if You Exceed the Annual Gift Tax Exclusion?
In addition to the annual gift tax exclusion, there is a lifetime gift tax exclusion. The lifetime gift tax exclusion is tied to the estate tax exemption, which is currently $5,490,000.
So if you decide to go crazy this year and give away $514,000 to one person, then you will have exceeded your annual gift tax by $500,000. What this would do is decrease your estate tax, dollar for dollar, by $500,000. So if you died later this year, your estate would only qualify for an exemption of $4,990,000.
What is the point of the Federal Gift Tax?
Here’s why the Federal Gift Tax is such a big deal, and why it is important.
It was created to prevent individual citizens from giving away all of their money before they passed away, thereby avoiding paying any estate tax.
In terms of federal taxes, the gift tax is frequently forgotten, or misunderstood, or both.
But even though the purpose of the gift tax is to keep people from avoiding estate taxes, the unlimited nature of the tax will still allow people to give away a significant portion of their assets without ever filing any type of gift tax return at all.
Example: Let’s say you have 500 friends, and you decide that you want to give them all $14,000. Using your annual gift tax exclusion, you can give all of these friends $14,000 each, or $7,000,000 total. That $7M is now out of your taxable estate for good, without anyone having to pay any tax on anything. However, let’s say you had failed to work with an estate planning attorney and you decided to leave that same amount of money to the exact same people through your will when you died. Because your estate would exceed the Federal Estate Tax Exclusion, your estate would have to pay estate taxes before paying our your gifts.
Tax Basis for Gifts
If you do decide to give money or property away, you should understand how tax basis comes into play.
Tax basis is the amount that you paid for the asset. If you are giving away cash, then it doesn’t matter. But many wealthy donors like to give away “low basis stock”.
For example, let’s say you purchased Apple stock 20 years ago when it was trading at $10 per share. Since Apple has appreciated so much and is now trading at an all-time high, you decide to give some of your stock away. If you give this stock to an individual, they will receive your basis in the stock – $10 per share. So if they decide to sell the stock, they will incur capital gains taxes on your embedded gain.
However, let’s say you give the stock away through your will. If this same person inherits the stock, they will receive a “step-up” in basis – the share price on the day you died. This could save your heirs a great deal of money, just by holding off on giving them the stock until you pass away.
What is a valid “gift”?
According to the IRS, a gift is the transfer of property from one individual to another while receiving nothing, or less than full value, in return.
There are a number of “gifts” that are not considered “taxable gifts”, and will not count as part of your $5.49 million lifetime gift tax exclusion.
- Charitable Gifts. You can give away as much as you want to charity and then deduct that amount from the value of the gift.
- Gifts not exceeding $14,000. As long as your gift does not exceed the present annual gift tax exclusion, it is excluded from the lifetime gift tax exemption.
- Gifts of Tuition. So long as you pay the tuition directly to the institution, the gift is excluded.
- Gifts of Medical Expenses. Again, if you pay the institution directly, the gift is excluded.
- Gifts to your spouse. You may make unlimited gifts to your spouse free from tax.
- Gifts to a political organization.
Gift Taxes in North Carolina
If you are a resident of North Carolina, you do not need to worry about either Gift Taxes or Estate Taxes. Our gift tax was repealed on January 1, 2009, and our estate tax was repealed on January 1, 2013.
Interested in learning more about the Gift Tax and how much you can give away?
North Carolina Estate Planning Attorney James Hart helps individuals to put together a plan to maximize their family wealth and protect their assets for their heirs.
Contact our office at (919) 460-5422 or via our online contact form to schedule a no-cost wealth planning session ($350 value).