I love the Holiday Season…the festivity, the peace on earth, good will, and of course Federal Gift Taxes…
During this festive time of year, most people do not think about the fact that giving assets from your estate to another person is, technically, “gifting” under the IRS Rules. Does this mean that you, my generous readers, owe a gift tax to the IRS?
This is an important Florida estate planning and Florida estate tax planning topic, especially for larger estates, and is appropriate for this time of year to be sure. Continue reading to find out more about what can be excluded from the gift tax…before you get out your debit card.
Definition of a Gift Under IRS Rules
It is important to first define what a “gift” is for purposes of the IRS Gift Tax Rules, and this definition is as follows:
A Gift is any “transfer” of an “asset” to a recipient if the giver does not receive full “consideration”. This is an issue that we’ve previously discussed concerning Florida asset protection. A “transfer” is a intended change of permanent ownership as opposed to a theft or an intent to lend something that will be returned. “An “asset” is something that is owned by an individual or married couple. Consideration” is an exchange of value for value…so if you paid $50.00 for the shirt you’re wearing, you provided consideration and did not receive the shirt as a gift. Ok, with this in mind, let’s look at the Federal Gift Tax Exemptions.
Exclusions from Gift Taxes under IRS Rules
It is important to determine for estate planning purposes what can be excluded from gifts for Federal Gift Tax purposes, and there are 4 exclusions as follows:
1. The annual gift tax exclusion under the IRS Rules for 2014, 2015 and 2016 is $14,000 per donor or $24,000 for gifting from a married couple.
The exclusion amount of $14,000 per donor or $24,000 for married couples is excluded from the gift tax for any number of beneficiaries, provided the limit is not exceeded for any one beneficiary.
2. Tuition or Medical Expenses that you pay for someone is exempt for the Federal Gift Tax under IRS Rules.
The key here is to pay these expenses for someone, rather than giving the money to them so they can pay for it. Remember, these kind of gifts needs to be documented or additional taxes could be incurred.
3. Gifts to a spouse are exempt from the Federal Gift Tax under IRS Rules.
Spousal gifts can include same sex couples under currently legislation because the IRS code refers to legally recognized marriages. The IRS regulations notate the fact that the terminology concerning husbands and wives may be applied to same sex spouses.
4. Gifts to a political organization for its use are exempt from the Federal Gift Tax under IRS Rules.
They key to this exemption, in my humble opinion is…for the use of the organization. So you technically cannot give funds to a political organization for any reason other than “its use”. Is it just me or is there some gray area here?
It is important not to confuse the Gift Tax Exemption with an Income Tax Deduction because Gifts to your friends and family may be exempt but are generally not Income Tax Deductible. Other kinds of gifts, such as a gift to a charity, may be exempt and also offer Income Tax Deductions.
All of the above should be reviewed with your estate attorney and tax advisor.
As a side note, the lifetime gift tax exemption is also applicable to all gifting, and this is a maximum allowed exemption for gifts that do not fall within the exemptions stated above. In 2016, the applicable lifetime Estate Tax and Gift Tax exclusion amount is $5,450,000.
Another important point is that a gift received is not income taxable. If it is an asset, the basis will be the fair market value of the asset when received…if the value increases thereafter, there may be income taxes for capital gains.
By now, you’ve discovered that there may not be a tax concern for your gift giving this Christmas Holiday Season. For my readers who are big spenders, remember keep good records…wouldn’t want the Grinch to steal your Christmas cheer.
Happy Holidays and Happy Gift Giving!