With only two weeks until Christmas, gifts seem to be high on everyone’s
radar. While this article is about gift-giving, it’s not necessarily about
those presents wrapped under the tree. Gifts, in the IRS’ mind, qualify as any
transfer made without receiving full (or any) value in return. The gift tax is
applied on these transfers, whether or not the giver intends for it to be a
gift. This might sound like a damper on the holiday season, but the gift tax
may not be exactly what you expect.
The Basics
The
federal government imposes a substantial tax on gifts of money or property
above certain levels. Without such a tax, someone with a sizable estate could
give away a large portion of their property before death and escape estate
taxes altogether. For this reason, the gift tax acts more or less as a backstop
to the estate tax. Yet few people actually pay a gift tax during their
lifetime. A gift program can substantially reduce overall transfer taxes;
however, it requires good planning and a commitment to proceed with the gifts.
Advantages of Gift Giving
You may
have many reasons for making gifts - some people have personal motives, others
are motivated by tax considerations. Many want their gift-giving program to
meet both personal and tax-planning objectives. Reasons for considering a
gift-giving plan include:
- Assisting someone in immediate
financial need
- Providing financial security
for the recipient
- Giving the recipient
experience in handling money
- Seeing the recipient enjoy the
gift
- Taking advantage of the annual
exclusion
- Paying a gift tax now to
reduce overall taxes
- Giving tax-advantaged gifts to
minors
Gift Tax Annual Exclusion
Perhaps
the easiest way to reduce the size of your taxable estate is to make regular
use of the gift tax annual exclusion. You may give up to $12,000 each year to
as many persons as you want without incurring any gift tax. (Congress has now
indexed this gift level to inflation; however, the figure will rise only in
increments of $1,000.) If your spouse joins in making the gift (by consenting
on a gift tax return), you may (as a couple) give $24,000 to each person
annually without any gift tax liability.
Unlimited Gift Tax Exclusion
In
addition to the $12,000 exclusion, there is an unlimited gift tax exclusion
available to pay someone's medical or educational expenses. The beneficiary
does not have to be your dependent or even related to you, although payment of
a grandchild's expenses is a common use of the exclusion. You must make the
payment directly to the institution providing the service -- the beneficiary
himself or herself must not receive the payment.
Gift Programs and Your Estate
Use of the
gift tax exclusion in a single year may not affect your estate tax situation
significantly, but you can reduce your taxable estate substantially through a
planned annual program of $12,000 gifts ($24,000 if you are married). All gifts
within the exclusion limits are protected from federal estate taxes.
In
addition to reducing the size of your estate, another major tax advantage of
making a gift is the removal of future appreciation in the property's value
from your estate. Suppose that you give stocks worth $50,000 to your children
now. If you die in 10 years and the stock is worth $130,000, your estate will escape
tax on the $80,000 appreciation even though you pay a gift tax on your next tax
return.
To learn
more about gifting strategies and how they can play a role in your tax and
estate planning, contact us to schedule a consultation. We'll be happy to help.
If we at Kemp Harvest Financial Group can
help you in any way with regard to your financial planning needs, please feel
free to contact
us.
For more topics like this, check out our radio show
“Retirement Plain and Simple” every Saturday morning at 8 on WNPV 1440 AM
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Material discussed is meant
for general illustration and/or informational purposes only and it is not to be
construed as tax, legal, or investment advice. Although the information has
been gathered from sources believed to be reliable, please note that individual
situations can vary therefore, the information should be relied upon when
coordinated with individual professional advice. Past performance is no
guarantee of future results. Diversification does not ensure against loss. NPC # 102568 12/17
Source: Financial Visions,
Inc.
