What You Need To Know About Gift Taxes

What You Need To Know About Gift Taxes 800 800 Bernstein Financial Services

You’ve all heard about giving gifts to children. If you give $15,000, is it income to them? Can they deduct it? What happens? Read on to learn about Gift Taxes in the United States.

First of all, you don’t deduct gifts and whoever receives it does not pay taxes. It’s a transfer of money or assets.

Also, if you give less than $15,000 in 1 year, you don’t have to fill out any paperwork. If you give more than $15,000 in 1 year, you’re supposed to fill out a form called 709 Gift Tax Return and there’s no tax to pay if you’re under the exclusion. For most states, the exclusion is $11.5 million. Sometimes a little bit less. So, if you give a couple hundred thousand dollars, no tax.

Why do I have to fill out the form when there’s no tax? Well, when you die, there’s that $11.5 million dollar estate exclusion. And the amount over the $15,000 added up over the years reduces that estate exclusion. So, we keep track of it. You say, “well my estate isn’t worth that much, why do I have to do that?” Well, you never know. You might inherit money or win the lottery. Who knows what might happen. Life insurance. Congress might lower the exclusion. So fill out the form.

Now, it’s $15,000 per person, so I can give 17 different people $15,000 each. I would not have to fill out the form. But if I give 1 more than $15,000. You have to fill out them form.

Now, if I’m married, my spouse and I can give $15,000 each to a child. And if that child is married, we can give $15,000 to the spouse too. Add it up and that’s $60,000 in 1 year. You can give without filling out any forms. You can do that every year.

So, you can see there’s lots of ways… For example, if you do it in December and January, you have two separate years. You can give $120,000 to them, for a downpayment on a house or something like that.

Additional gift tax items you’d have to worry about when you gift assets… let’s say you give a house when you’re alive to a child. Well the gift is the equity position. So if the house is worth $200,000 and there a loan on it for $50,000, you’ve made a gift of $150,000. Is there gift tax on that? No, not unless you’re a sure of your exclusion, which is very high. You have to fill out a form? Yes. It’s two or three pages long. Not difficult to take care of that.

Let’s say I want to give a $100,000 gift to my two children and it’s March. Well, that’s over the $60,000 I talked about. So, how about you gift them $60,000 and you loan them $40,000. You say, you have to sign this note, you owe me $40,000. Well, you don’t have to charge interest, that’s okay. And guess what you’re going to do on January 1 of next year? You’re going to forgive that loan. It’s a gift for the next year. It’s allowed. You have to do the paperwork. What have you avoided? You don’t have any tax, unless your estate goes over $11.5 million because you haven’t used it in your exclusion. But you’ve avoided forming the 709 Forms, which can be a little bit of a hassle for people.