Many of you have worked hard and have saved all your life to achieve financial security and a comfortable nest egg. However, due to current economic conditions your children may be struggling to pay their bills, buy their first home, or start saving for retirement. You may want to help them right now, when they really need it, but you aren’t sure about the tax consequences. There is good news! Over the last few years, the tax consequences to gifting have become much less onerous.
Taxation on gifts is regulated as part of a combined gift and estate tax. In 2014 everyone has a lifetime combined estate and gift tax exemption of $5.34 million. If you are married, you have a combined exemption of $10.68 million dollars.
Additionally, you can annually gift up to $14,000 to any number of recipients without chipping away at your lifetime exclusion of $5.34 million. Generally, gifts to your spouse or a qualified charity are not subject to gift and estate tax. If you exceed the annual gift limit of $14,000 to a single individual, you are required to file a gift tax return (Form 709) to report your gift. However, you will not owe any taxes until you exceed your lifetime exclusion of $5.34 million. Once the combined exclusion of $5.34 is exceeded, tax is imposed on the person gifting or transferring the assets, not the recipient.
You may want to make gifts to various friends or family members to help them through a rough patch or you may want to reduce your net worth to avoid or minimize estate tax. By gifting up to $14,000 per year to several different individuals, you can reduce the amount of money that may ultimately be subject to estate tax. For example, if you are married and have married children with a total of five children, both you and your spouse can each give $14,000 to each child, $14,000 to their spouses and $14,000 to each one of your grandchildren – every year. This comes to a total of $252,000 in gifts per year that can be legally removed from you estate and avoid estate taxation.
According John Buckley, a nationally recognized Estate and Business Planning Attorney, gifts that are used for most education and medical expenses are not subject to the $14,000 annual gift tax limit. Direct payment must be made to the educational institution or medical provider and not to the recipient. This is a huge benefit since many gifts are given to cover education expenses.
Gifting can be a great way to minimize estate tax if you have a large net worth. However, most of us save just enough to cover our retirement needs. The desire to help family and friends is very natural, but avoid the temptation to gift money, especially to children, at the expense of your own financial security and retirement.