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What you should know before you plan that big gift

As part of your estate plan, you may have considered making a large gift to a loved one while you are still alive. There are many reasons to do this. Perhaps you want to help someone in need, invest in a loved one’s business or just enjoy their enjoyment of a piece of property. Some property is easier to transfer now than making your family put it through probate. Before you make that big gift, however, you should know a few things about the federal gift tax and its exemption.

  • Annual exclusion limit. Under federal tax law, you can gift up to $15,000 per year for 2018 and 2019 to as many people as you like without having to report the gift to the IRS. Married couples can give $30,000.
  • Lifetime exemption limit. In 2019, the IRS will allow you to give up to $11.4 million over the course of your lifetime without paying taxes, and $22.8 million for a married couple. After that amount, you must start paying taxes. The IRS keeps track of how much money you have gifted by requiring you to file a Form 709 for each year that you make a gift over the annual exclusion limit.
  • Exceptions to the gift rule. The IRS does not view the following as gifts that count under the gift tax rule:
    • Gifts to your spouse
    • Medical expenses or tuition
    • Donations to political organization
    • Gifts under the annual exclusion amount
    • Gifts to charities

The following example may help explain how this process works in action: Joe and Martha are married with two children. In 2012, they gave a gift of $20,000 to each child. The annual exclusion amount for 2012 was $26,000 for a married couple, so they did not have to file a Form 709 to report the gift in 2012.

In 2015, however, they transferred title to the family cabin to child one, which had a fair market value of $200,000 at the time. The annual exclusion in 2015 was only $28,000 for a married couple, so they did file a Form 709 for 2015, even though they did not have to pay taxes on their gift. In 2016, they decided they had better even the score so they gave child two a cash gift of $200,000. They filed a Form 709 for 2016 to report that gift, as well. They have now used $400,000 of their lifetime exemption. Under 2019 rules, they can gift $22.4 million more before they have to pay any taxes on their gifts, but they still have to report to the IRS any year they make a gift over that year’s exclusion limit.

Lifetime gifts are a great tool in some circumstances, but are not the right option for everyone. You may wish to discuss the different options and possible drawbacks with a CPA or other tax professional before deciding how to proceed.

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