A common misconception is that the federal gift tax applies to the giver of a gift, not the recipient, for amounts above a specified level. But luckily, most gifts are sheltered from gift tax by the annual gift tax exclusion and the lifetime gift tax exemption (or both).
New in 2018, you can now give gifts valued up to the annual gift tax exclusion amount each year without ever touching the lifetime exemption. Back in 2017, the exclusion was $14,000 per recipient. However, in 2018, it has now increased to $15,000 per recipient.
The annual gift exclusion is available to each taxpayer. If you’re married and your spouse agrees to a joint gift, also called a “split gift,” the annual exclusion amount is effectively doubled to $30,000 per recipient for 2018.
In 2018, estate and gift tax exemption will be $5.6 million per person and $11.2 million for married couples.
Absent any radical developments, there still would be an incentive to give lifetime gifts from a tax perspective. For instance, you might gift securities or other assets to younger family members in lower tax brackets for two key reasons:
- To reduce your taxable estate at death. As long as a federal estate tax remains in effect, this could still be beneficial, especially to older taxpayers.
- To transfer income-producing assets to those in lower tax brackets. This could create income tax savings for your family over time.
Generally, the value of the assets for gift tax purposes is their fair market value. However, if you give away property, such as stock that has appreciated in value, the recipient must use your basis to compute the taxable gain if he or she subsequently sells the property. Depending on your situation, you might arrange to sell property first and give the cash proceeds to another family member. The subsequent gift is covered by the annual gift tax exclusion.
It is important that the gift be completed in the tax year contemplated. What this means is that if you give each of your children and/or grandchildren $15,000.00 next year, they have to have the power to use the funds and you, as the gift giver, must retain no power to control the funds. This means that you cannot simply earmark the funds for them in your revocable trust.
These types of issues can be complex and confusing. If you have questions about establishing an estate plan, gift taxes, or making gifts? Contact us to discuss what options you may have!