Lifetime gift tax planning allows you to give assets to loved ones, without paying gift taxes now or estate taxes later. Years ago, the federal government found that taxpayers were trying to avoid estate taxes, by giving away some of their property while still alive. As the donors saw their loved ones enjoying the gifts, the IRS saw the taxpayers avoiding or reducing estate taxes on these gifted assets at the death.
Consequently, the gift tax was enacted to keep people from avoiding the estate tax. The basic concept is this: when you give someone an asset that exceeds a permitted amount, you (the donor) must pay the IRS for that privilege, in the form of a gift tax.
If you are trying to use the lifetime wealth transfers to lower the total value of your estate and avoid or reduce estate taxes, here are three things you need to know:
- The annual gift tax exclusion is $15,000 in 2019.*
- The lifetime estate and gift tax exclusion is $11.4 million in 2019.*
- Some gifts are not subject to the gift tax at all.
Annual Gift Tax Exclusion
You can give away up to $15,000 per year, per beneficiary, with no gift tax consequences to the recipient or yourself. This strategy can be as easy as writing a check to each of your loved ones during the holidays. The assets you give away using the annual gift tax exclusion do not count toward the lifetime exemption.
Lifetime Estate and Gift Tax Exemption
Gifts exceeding the annual gift tax exclusion can fall under the lifetime estate and gift tax exemption, but you must file a timely gift tax return. For example, if one of your children is in a financial crisis, you should first maximize your annual exclusion and then apply gift amounts over that limit against the lifetime exemption.
The lifetime exemption is $11.4 million for 2019.* Before the Tax Cuts and Jobs Act (TCJA), the limit was $5.49 million in 2017. Unless made “permanent,” the current exemption amount will expire at the end of 2025 and the exemption could go back to the pre-TCJA limit.
The IRS combines the estate and gift tax exemption for a total exemption of $11.4 million. In other words, if you do not use any of the gift tax exemption while you are alive and you die in 2019, your estate will have the full $11.4 million estate tax exemption. If you use $4 million of the gift tax exemption while you are alive and you die in 2019, your estate will have a $7.4 estate tax exemption remaining. In this way, the federal estate and gift tax exemption is said to be a “unified” tax.
Some Gifts Are Not Taxable
First, there is no limit to the amount you can give to your spouse, if you are both U.S. citizens. However, if you are a U.S. citizen but your spouse is not, you can give up to $152,000 to your spouse in 2019.* Other common non-taxable gifts are:
- Tuition costs you pay for another person have no limit, as long as you pay the institution directly.
- Healthcare costs you pay for another person have no limit, as long as you pay the hospital or medical professional directly.
- Charitable contributions are also limitless, as long as the charity qualifies.
*As indexed for future inflation.
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