Making a Sizable Gift Without Paying Taxes

Good Morning Relaxing Retirement Member,

After our recent discussion about using a revocable living trust to help your family avoid the sizable cost and delays of probate, questions have come up about the tax implications of making a gift during your lifetime.

A lot of this has changed in the last few years, so I thought I’d take the opportunity to clarify some things surrounding the issue of ‘gifting’.

What’s considered a “gift”?

This may sound like a ridiculously simplistic question, but from a federal estate and gift tax perspective, the definition is very clear.

A gift occurs when you’ve given something of value to another person or entity with no retention of ownership rights to the gifted item itself.

In other words, a gift is only considered a gift when you no longer have any ownership rights after the gift is given.

You may receive benefits from it during your lifetime, such as income, but you no longer own or have any control over the asset itself.

How are gifts taxed?

Just as the federal government has instituted an estate (death) tax on your ability to pass on all of your accumulated assets at your death, they’ve also imposed a tax on your ability to give it away during your lifetime so that you don’t give it all away right before you pass.

And, this tax rate mirrors the estate tax rate, i.e. as high as 35%!

Are all gifts taxed?

During your lifetime, you may now give away $5.25 million without being subject to gift taxes (up from $1 million just a few years ago). This is what is known as your lifetime exclusion.

This, however, eats into your estate tax exemption. If you’ve given away $1 million during your lifetime, that reduces your $5.25 million estate tax exemption at death dollar for dollar.

The key is that, in addition to this, you may also give away $14,000 each year to anyone or any entity you wish without being subject to gift taxes. A couple could give away $28,000 ($14,000 each).

What if I give away more than $14,000 in one year?

If you give away more than $14,000 to any person in any given year, you are not necessarily subject to gift taxes. The amount over $14,000 simply eats into your lifetime exemption amount of $5.25 million.

Let’s say, for example, that you give away $100,000 to your son to help him purchase a home. If you have no spouse, then the first $14,000 passes without any gift tax. The remaining $86,000 eats into your $5.25 million lifetime exemption (and your $5.25 million exclusion at your death).

In other words, in addition to $14,000 per year, you may now pass on $5,250,000 during your lifetime without gift taxes.

The way the federal government keeps track of this is through your gift tax return which you must file if you provide a gift in excess of $14,000.

What is the tax rate?

Federal gift tax rates mirror estate tax rates and reach 35% very quickly.

Let me repeat that: 35%.

After working and saving your entire life, in addition to paying income and sales taxes, you then have to pay gift and/or estate taxes when you pass away.

Do I pay the tax when I make the gift?

Gift taxes are paid by the giver. So, if you give away money or assets that trigger a tax being due, you would have to file a gift tax return that year and pay the tax.

If you are the recipient, you do not pay gift taxes. And, in most cases, as the recipient, you don’t pay income taxes.

The exception to this is if you receive an appreciated asset such as a stock. If the stock was purchased for $10,000, and it is now worth $100,000, upon the sale of the stock, the recipient would be responsible for paying capital gains taxes, but not gift taxes.

I hope this has been helpful. You may very well want to print this and keep it where you can access it when you need it.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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