When you have worked hard to build up your net worth, you want to take the appropriate steps to ensure that you minimize the tax consequences to your loved ones on the transfer of your property at your death. One of the most effective ways to do that is to make gifts during your lifetime. There are specific rules, though, governing what constitutes a gift, how the value of a gift is determined and how much you can give away without creating a tax burden for the recipient.
What Qualifies as a Gift?
As far as the Internal Revenue Service is concerned, the definition of a gift is pretty simple—if you confer a benefit on someone without expecting to be paid or reimbursed for it, or receiving something of equal value in return, it’s a gift. Accordingly, passing a $20 bill out your window to a homeless person constitutes a gift, as does giving your car or any personal property to anyone. There can also be gift tax implications if you sell something at a price below the fair market value—a home, jewelry or any type of property. If you’ve loaned money without interest, the debtor has technically received a gift.
There are some exceptions. Gifts to spouses who have their U.S. citizenship are tax-free. You can also avoid gift tax implications for the payment of things like medical bills or college tuition, provided you make the payment directly to the institution.
How Much Can You Gift without Incurring Gift Tax Liability?
There are limits to how much you can give a person per year as a gift. You have two options—an annual gift tax exclusion and a lifetime gift tax exclusion. Currently, the annual exclusion is $15,000 per person per year, with no limit on the number of years. That doesn’t mean, however, that you can’t give away more than $15,000 per year. The lifetime exclusion is currently $11.18 million—if you exceed $15,000 to a donee in a given year, the lifetime exception kicks in and offsets the gift. In addition, the annual $15,000 never counts against your lifetime exclusion.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for special individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
Contact The Pinnacle Financial Group
At The Pinnacle Financial Group, we have provided professional risk management advice to individuals and businesses in New York and Connecticut for two decades. We understand the critical role insurance planning plays in your financial future. We will carefully explain your options and the different strategies available to you, so that you can make the right decisions for you and your loved ones.
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