THE BASICS OF GIFTING AND GIFT TAXES
Linda M. Toga
Whether it’s better to give or receive depends on the person—and the circumstances. And although circumstances vary, there are some basic facts that can assist you when considering the upside of gifting.
Under current federal law, everybody is allowed to make gifts up to $14,000 each year to an unlimited number of people. Regardless of how many gifts a donor makes during the year, as long as the value of the gifts going to any one recipient does not exceed $14,000, no gift tax return is required and no gift tax is due. Fourteen thousand dollars is the 2013 annual federal gift tax exclusion amount.
Also, there is no gift tax in most states. Some states, like North and South Carolina, Wisconsin, Delaware, Tennessee and Louisiana, do levy their own taxes. However, if a gift tax is due, it is paid by the donor of the gift, not the recipient.
Now, if you make a gift to a person that exceeds $14,000, only the part of the gift in excess of $14,000 is subject to gift tax. For example, in the case of a $20,000 gift, the first $14,000 of the gift passes tax free while the remaining $6,000 of the gift may be subject to gift tax.
If the gift is made by a couple whose marriage is recognized by the federal government (as opposed to a same sex couple), there will be no tax liability associated with the $6,000 because the husband and wife may “split” their gift, allowing them to gift a total of $28,000 to any one person in the course of a year.
As for taxation, if an individual donor makes gifts to someone with a value in excess of $14,000 during the course of the year, the donor is required to file a gift tax return in April of the year following. However, the fact that a gift tax return must be filed does not mean that gift tax is necessarily due the IRS. Why? Because every individual has the right to make gifts up to $5 million during the course of his or her lifetime without incurring any gift tax liability!
Once a donor’s $5 million lifetime cap has been reached, any gift in excess of $14,000 made by that donor to one person will trigger not only the need to file a gift tax return, but also to pay the gift tax on the portion of the gift in excess of $14,000. Most people don’t know about this amazing-but-true fact–now you do!
Another thing worth knowing: Some donors take advantage of the fact that they can make gifts without incurring a gift tax in order to reduce the size of their estates subject to estate tax. In other words, smart gifting can reduce your estate tax liability.
If a donor can afford to give away assets during his or her lifetime, annual gifting to family members or friends in amounts less than $14,000 allows the donor to decrease the size of his estate that is subject to estate tax without any incurring any tax liability. Nice, isn’t it?
So check with your accountant as well as your lawyer, as necessary, since serious gifting can be a critical part of a comprehensive estate plan and tax reduction strategy.
Linda M. Toga, is the owner of the East Setauket-based Law Offices of Linda M. Toga, P.C. where she focuses on estate planning and administration, as well as litigation and issues involving real estate and small businesses. Linda is a frequent lecturer and the author of Legally Speaking which appears monthly in the Times Beacon Record Newspapers. Contact: Linda@LMTogalaw.com
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