Recently we have been receiving quite a few inquiries from parents looking to gift money to their children. People may give for various reasons, but one of the most common reasons we have heard lately is for a down payment on a first home. There seems to be a lot of confusion about how much can be gifted annually without being subject to the “gift tax”.
For 2013, the Annual Gift Exclusion Amount is $14,000
What this means is you can gift $14,000 in 2013 to your son, daughter, niece, nephew, neighbor, or a random guy on the street. You can give EACH of them $14,000. The $14,000 gift does not have to go to a member of your immediate family (they don’t even have to be related to you at all for that matter). If you are married, then you and your spouse can each give $14,000 to anyone you chose without being subject to gift tax. Just to be clear, that means if you are married you can gift $28,000 to anyone you want in 2013 and pay nothing in gift tax on that gifted money. Also, it doesn’t have to be cash. You can also gift stocks, bonds, property, artwork, etc.
Now is where things get a little trickier...
Let’s say that you want to give your son $50,000 for whatever reason. So you and your spouse each gift $14,000 for a total of $28,000. That leaves $22,000 remaining that you need to transfer to your son. How can you get him that money without being subject to gift tax? Simply gift him the additional $22,000 and file IRS form 709 and potentially pay no tax on the additional gift! Notice I did say “potentially” no gift tax. For those of you that intend to give more then $5.25 million there could be some gift tax liability. However, for those of you reading this who never intend to give away that much, you shouldn’t be subject to any gift tax on the additional $22,000.
A little history on why this works: Prior to 1976 wealthier people that were looking to avoid paying estate taxes at their death found a way to circumvent the estate tax by simply gifting assets to their heirs while they were still alive. In 1976 congress “unified” the estate and gift tax law so that any gifts you made during your lifetime over the annual exclusion amount ($14,000 in 2013) would count towards your lifetime exclusion amount. In 2013 the lifetime exclusion amount is $5.25 million per person. So a married couple could gift $10.5 million over their lifetime without paying gift tax.
So, John and Jane Doe could gift $50,000 to their son outright and not pay any gift tax on the entire amount. The first $28,000 would fall under the annual exclusion amount and the remaining $22,000 would be applied to their lifetime exclusion amount of $10.5 million. Based on the current laws of 2013 John and Jane would have $10,478,000 left of their lifetime exclusion.
Consult with a qualified tax professional and your financial advisor for help navigating the gift tax.
For additional information please refer to IRS publication 950. The link is included below: http://www.irs.gov/uac/Publication-950,-Introduction-to-Estate-and-Gift-Taxes-1
The information contained in this report does not purport to be a complete description of the subjects referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The example provided is hypothetical and for illustration purposes only. Actual investor results may vary. Please not, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.