A lot of folks are not sure how the Annual Gift Tax Exclusion works. First, the gift is not an income tax deduction for the giver. It is not taxable income to the person receiving the gift.
Second, Congress decided we don’t have to keep track of small gifts. However, “big” gifts must be reported on the annual form 709 U.S. Gift Tax Return.
“Big” gifts are defined as the total gifts in the calendar year to each person that are valued at more than $14,000.
Also, payments directly to a university or school and payments made directly to medical providers are not “big” gifts, no matter how much is given. And you can pay the medical insurance premiums for someone and that is not counted as a “big” gift either.
People who are married to each other can each make gifts. If one person has a lot of wealth and the other has little, they can elect to treat the gifts by one as being 50 percent from each of them. That means $28,000 of total gifts to one person can qualify for the Annual Gift Tax Exclusion for a married couple if they elect to split the gift.
The gift does not have to be money. You could give personal property (jewelry, furniture, art, etc.) and give a partial interest in real estate or ownership of a business. A qualified appraisal is needed if the item is not stock that is traded on an exchange.
If you have an item (say, jewelry) that cost $500 and is now worth $2,500, you could give that and wouldn’t have to pay a tax on the appreciation. However, the person receiving the gift has a tax basis of $500. If they sold it later, they would have a gain or loss on sale of the item. The tax basis transfers from you to them.
Some folks recently were considering giving their daughter a gift of $228,000 so she could own her home free and clear of debt. The Annual Exclusions of $14,000 for each of the parents would be listed on Forms 709 and the “big” gift of $200,000 would be reported — $100,000 from each of them.
They would not write a gift tax check to the IRS unless the total “big” gifts in their lifetimes totaled more than $5,250,000 each. The taxable (“big”) gift of $100,000 for each of them just reduces their lifetime death tax exclusion to $5,150,000 if they had not ever made any other taxable (“big”) gifts.
We urge clients to do a “love letter” with the gift. Many times the letter is more valuable than the gift! The letter should clearly state it is a gift, out of love and affection and go on to say how much they love the person, etc.
Did you hear? “We all grow better in sunshine and love.”
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Co. CPAs.