‘Tis the season of giving—this December, countless gifts have been and will be exchanged between families, friends, coworkers and neighbors. In America, even many people who don’t celebrate gift-giving holidays like Christmas exchange gifts at the end of the year in accordance with the traditions of their friends and families. The last thing any of us want to be thinking about while selecting or opening gifts, is taxes, and normally, we don’t have to. But, if the end of the year has inspired you to think about bigger gifts—like property, or perhaps a new car for your loved one—here are some things you may want to be aware of before you actually write out that check.
Every individual currently has a lifetime estate and gift tax exemption which can either be gifted during your lifetime or left to one or more individuals as part of your estate after your death. There is no gift or estate tax owed to the federal government for gifts below the exemption amount. In 2019, the exemption is $11.4 million per person ($22.8 million for a married US citizen couple). However, this amount is not set in stone and a lot may depend on who is at the helm running the country. For example, before the 2019 tax law changes went into effect, the estate and gift tax exemption was $5.25 million and prior to 2012, it was at $3.5 million per person. If we listen to the media right now, there are talks that we may very well be going back to the $3.5 million amount even as early as next year. Since the IRS has clarified that those individuals making gifts now in order to take advantage of the current exclusion amounts will not be adversely affected should there be a decrease in the future, making large gifts now may not be a bad idea.
Keep in mind, the lifetime exemption exclusion amount is not the only amount to consider when gifting—in addition to your lifetime estate and gift tax exemption, there is a $15,000 annual gift tax exclusion (2019 amounts). This amount is per donor per year, so a joint gift from spouses to a child and the child’s spouse can add up to as much as $60,000 per year gift to your child and his or her spouse. Once you exceed that amount, the excess gift will be deducted from the overall lifetime exclusion amount. There is no gift tax, but the excess gift needs to be reported on a gift tax return the following year along with your income tax filing.
A few points to note: In your haste to see the surprise and joy on your loved one’s face, do not gift away highly appreciated property. We have a lot of families who deed over their primary residences or gift stock that they had purchased several years ago that have accumulated significant gain. This could result in an unexpected and adverse capital gains tax at the time of sale. Finally, if you or your loved one is a non-US citizen, be careful to consider the specific nuances associated with gift giving, as the rules slightly differ here: see what I have written about previously in New Jersey Law Journal.
There are few things better than the warm feeling you get from seeing a loved one enjoy a gift you have given them—but it will benefit both of you in the long run if you are intentional about your gift-giving and plan out ways to avoid tax inefficiencies in doing so. When making gifts, speak to your estate planning attorney, your CPA and your financial advisor to make sure that you approach gift-giving the right way and you can begin the New Year with your right foot forward.