How to Navigate Around The Gift Tax:
Many people aren’t aware of the fact that, in
most situations,there really is no gift tax. Here’s why…
$14,000 Annual Exclusion
The federal government gives each of us
an allowance to gift anybody $14,000 per year
without incurring any gift tax. This $14,000/year
replenishes every year, and it’s $14,000 per person.
So, theoretically, I could gift every person that
I know $14,000 today, and then another $14,000
next year and the year after,and there would
be NO gift tax.
an allowance to gift anybody $14,000 per year
without incurring any gift tax. This $14,000/year
replenishes every year, and it’s $14,000 per person.
So, theoretically, I could gift every person that
I know $14,000 today, and then another $14,000
next year and the year after,and there would
be NO gift tax.
$5,490,000 Lifetime Exclusion
What most people don’t realize, is that there’s
a second allowance of $5.49mm! In other words,
let’s say that I want to give you $114,000.
That’s $100,000 more than what I can give
you out of my $14,000 annual bucket. That’s
not a problem at all, because I also have the
$5,490,000 bucket. The $5.49mm bucket is
called my “Lifetime Exclusion.” If I use any
of it during my lifetime, I simply reduce my
estate tax exclusion by that amount.
a second allowance of $5.49mm! In other words,
let’s say that I want to give you $114,000.
That’s $100,000 more than what I can give
you out of my $14,000 annual bucket. That’s
not a problem at all, because I also have the
$5,490,000 bucket. The $5.49mm bucket is
called my “Lifetime Exclusion.” If I use any
of it during my lifetime, I simply reduce my
estate tax exclusion by that amount.
So in our example, if I gift you $114,000,
I would take $14,000 out of my annual bucket
and $100,000 out of my lifetime bucket. My
annual bucket replenishes each year. But
my lifetime bucket does NOT replenish. In fact,
I must reduce my lifetime bucket by $100,000,
so now my lifetime exclusion is “only” $5.39mm
instead of $5.49mm.
I would take $14,000 out of my annual bucket
and $100,000 out of my lifetime bucket. My
annual bucket replenishes each year. But
my lifetime bucket does NOT replenish. In fact,
I must reduce my lifetime bucket by $100,000,
so now my lifetime exclusion is “only” $5.39mm
instead of $5.49mm.
Now, if my estate is less than $5.39mm, this
would not be a problem at all, because my heirs
would have no estate tax anyhow. However,
if my estate is more than $5.39mm, than my
heirs would have to pay estate taxes on anything
inherited above $5.39mm. In other words,
the lifetime exclusion bucket is used for both
gift and estate tax purposes.
So every time I use it to not pay gift taxes,
I’m also reducing my estate tax exclusion…
that’s how and why the gift tax and the estate
tax are related to one another.
would not be a problem at all, because my heirs
would have no estate tax anyhow. However,
if my estate is more than $5.39mm, than my
heirs would have to pay estate taxes on anything
inherited above $5.39mm. In other words,
the lifetime exclusion bucket is used for both
gift and estate tax purposes.
So every time I use it to not pay gift taxes,
I’m also reducing my estate tax exclusion…
that’s how and why the gift tax and the estate
tax are related to one another.
No Relationship Required
You don’t have to be related to use either of
these buckets. You can gift $14,000/year to a
complete stranger and you would have no gift tax.
You can also gift money to a complete stranger
using your lifetime exclusion bucket, and you
would have no gift tax.
these buckets. You can gift $14,000/year to a
complete stranger and you would have no gift tax.
You can also gift money to a complete stranger
using your lifetime exclusion bucket, and you
would have no gift tax.
$10,980,000 Total Exclusion for Married Couples
One thing to keep in mind about the lifetime
exclusion bucket is that the amount changes
each year. In 2016, the exclusion was $5,450,000.
In 2017, the exclusion is $5,490,000. Also, keep
in mind that I can “port” over my $5.49mm
to my spouse if I’m married. So technically,
a married couple could have a total joint exclusion
of $10,980,000! Therefore, if you are married and
your net worth is less than $10,980,000, there
is absolutely no reason whatsoever for you to
concern yourself with the gift tax. That’s because
even if you gift your entire net worth during your
lifetime, you would pay $0 in gift taxes and your
heirs would pay $0 in estate taxes. That’s why
the gift tax is really a non-issue for most people!
exclusion bucket is that the amount changes
each year. In 2016, the exclusion was $5,450,000.
In 2017, the exclusion is $5,490,000. Also, keep
in mind that I can “port” over my $5.49mm
to my spouse if I’m married. So technically,
a married couple could have a total joint exclusion
of $10,980,000! Therefore, if you are married and
your net worth is less than $10,980,000, there
is absolutely no reason whatsoever for you to
concern yourself with the gift tax. That’s because
even if you gift your entire net worth during your
lifetime, you would pay $0 in gift taxes and your
heirs would pay $0 in estate taxes. That’s why
the gift tax is really a non-issue for most people!
No Gift Tax to the Recipient
Now, everything we just talked about applies to
the person GIVING the gift. What about the
person RECEIVING the gift? Well, here's
some more good news: there is no tax to
the gift recipient.
the person GIVING the gift. What about the
person RECEIVING the gift? Well, here's
some more good news: there is no tax to
the gift recipient.
What Paperwork is Required?
If you're using the $14,000 annual bucket,
the gift doesn't need to be reported to the IRS
if you follow the proper procedures. However,
if you're using the $5,490,000 lifetime bucket,
you would need to file a gift tax return with the
IRS (even though no gift tax would be due). This
is done to simply notify the IRS that you're using
part of your gift / estate tax exclusion.
the gift doesn't need to be reported to the IRS
if you follow the proper procedures. However,
if you're using the $5,490,000 lifetime bucket,
you would need to file a gift tax return with the
IRS (even though no gift tax would be due). This
is done to simply notify the IRS that you're using
part of your gift / estate tax exclusion.
Also, make sure the the checks are written from
the specific individuals who are giving the gift. In
other words, if mom is gifting you $14,000, and
dad is also gifting you $14,000, you'll need two
separate checks: one from mom and one from dad.
We might also have to "source" these funds from
a mortgage underwriting standpoint.
the specific individuals who are giving the gift. In
other words, if mom is gifting you $14,000, and
dad is also gifting you $14,000, you'll need two
separate checks: one from mom and one from dad.
We might also have to "source" these funds from
a mortgage underwriting standpoint.
PLEASE NOTE: THIS LETTER AND OVERVIEW IS
PROVIDED FOR INFORMATIONAL PURPOSES
ONLY AND DOES NOT CONSTITUTE LEGAL, TAX,
OR FINANCIAL ADVICE. PLEASE CONSULT WITH
A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE
PERTAINING TO YOUR SITUATION. FOR MORE
INFORMATION ON ANY OF THESE ITEMS, PLEASE
REFERENCE IRS PUBLICATION 559. ALSO, THIS ARTICLE
REFERENCES THE FEDERAL GIFT TAX.
YOUR STATE GIFT TAX LAWS MAY
BE DIFFERENT.
