The holidays are a season of generosity, and often during the last few months of the year, I have clients calling to ask, “At what point does a gift become taxable?” In 2020, you are able to gift up to $15,000 to one person without triggering a reportable event. If you are married, both you and your spouse can gift $15,000 to one person, bringing the total to $30,000 per recipient. The amount of people you gift to is unlimited. Also, gifts are not limited to cash and can be anything under the reportable limit, such as a car, a piece of property or stock.
One item that is particularly confusing about “gift taxes” is that if you give above the exclusion amount, it actually does not trigger taxation. You have to file form 709 to report the amount above the gift tax threshold, which will apply to your lifetime exclusion amount. In 2020, there is a lifetime exclusion of $11.58 million per individual, which is going to go up to $11.7 million in 2021. In other words, even families considered to be “high net worth” likely won’t become entangled with estate taxes in its present tax form. (To find out more about this concept, please see our late 2019 blog post on this written by our wealth management company).
Gifting is one strategy that can help you with your estate planning and can be a way to transfer wealth from one generation to another. When gifting something other than cash, such as stocks or property, it is important to know your cost basis. With a lifetime gift, your cost basis transfers to the recipient. When exploring the use of gifts other than cash, it is best to work with your financial and tax advisor to determine what the best type of asset is to transfer.
Certain gifts are excluded from the lifetime limitation, such as payments for medical or educational expenses. The one caveat of this is that the gift must be paid directly to the provider of the services, such as for qualified medical expenses made directly to the facility or to the college for tuition.
If you are looking to provide a gift for a younger generation for college expenses, you can fund a beneficiary’s 529 college savings plan. You are allowed to make a five-year accelerated gift into a beneficiary’s 529 plan by utilizing five years’ worth of your annual gift tax exclusion. This allows you to make a gift of up to $75,000 to each beneficiary’s 529 plan today even though it’s technically considered made ratably over five years. This allows you to begin enjoying tax-deferred and potentially tax-free growth on those assets. If you outlive the five-year term, the entire gift is excluded from your estate. Furthermore, there can be state tax benefits for 529 contributions, so you will want to educate yourself on the plans or work with a tax professional and financial advisor to understand the nuances of 529s.
If you have questions about your gift, please feel free to reach out and ask. Have a safe and happy holiday!