Clients often consult us before making substantial gifts. We find that many of these clients have similar misunderstandings about the tax implications of sizable gifts. These misunderstandings frequently stem from statements by family, friends, or even other professionals. The following is our attempt to answer and simplify some common gift tax myths.
If I receive a large gift, I will owe tax.
FALSE.
The gift recipient (the “donee”) is not responsible for the gift tax, if any. The individual making the gift (the “donor”) might be required to report and pay tax on gifts as explained below.
All gifts are subject to tax.
FALSE.
Donors can give unlimited amounts to spouses and charities. Donors may also be able to pay for a donee’s qualifying medical and tuition expenses without limitation. All other gifts are subject to the rules explained below.
I can only give away $15,000 per year.
FALSE.
$15,000 is the 2019 annual gift tax exclusion – the de minimis amount that one can give to each of any number of individuals during the year without reporting to the IRS. The exclusion amount was $10,000 in 2001 and increased in $1,000 increments to the current figure. The exclusion will continue to increase periodically with inflation.
If I give away more than $15,000, I will owe tax.
PROBABLY NOT.
Gifts in excess of the annual exclusion may be subject to gift tax and should be reported on a gift tax return. But tax is rarely due simply because the donor gave more than $15,000 to a single donee during the year.
If the donor is married, he or she can split gifts with a spouse to double the exclusion amount, thereby excepting a larger amount from gift tax consideration.
Tax will be due only if the donor has used all his or her lifetime exemption. This is the aggregate amount that the donor can give away during his life or at his death (excluding the exceptions discussed above) without incurring tax. The 2019 lifetime exemption is $11.4 Million per taxpayer. Most taxpayers cannot give away enough to consume this exemption.
If I do not report all my gifts on a gift tax return, I will owe penalties and interest.
PROBABLY NOT.
The IRS can assess penalties and interest for failure to file and pay gift tax. However, these penalties and interest are calculated as a percentage of the tax due but not paid. If the tax due is $0, the penalties and interest are likewise nil.
Gifts can have negative consequences if not planned properly.
TRUE.
As explained above, most individuals can gift freely without fear of gift tax. However, there are a myriad of other factors that one should consider before completing a significant gift, including (but not limited to): other tax considerations, identifying the best assets to gift, who should receive gifts and how, when to make gifts, etc. For example, see MARYLAND ESTATE TAX – How lifetime gifts can eliminate the tax.
We are well-versed in gifting strategies and the associated considerations and are available to provide effective and practical analysis and recommendations. Please contact us if you would like to discuss your gifting plans.