How Do I Save Money With Tax Planning?

There are many confusing tax laws, but the one that seems to generate the most misunderstanding is the gift tax law.   Everyone seems to be aware that people can give up to $13,000 (this amount is periodically adjusted for inflation) a year with no tax consequences – but beyond that it’s fuzzy. A client asked me today if she would have to pay tax on a $100,000 gift her parents were planning to give her to buy a house.  The answer is no.

Here’s the low-down on the gift tax law:

1. Anyone can make gifts of up to $13,000 to as many people as they choose each calendar year without any tax implications. This gift is called an “annual exclusion gift” – meaning the gift is excluded from taxes. The donor can start all over again giving gifts up to 13,000 a person each and every year.

2. If a donor exceeds the annual exclusion (of $13,000) to any one person, tax is still not due until they have made gifts totaling an aggregate of more than $1 million during their lifetime.  A minor annoyance:  Form 709 – United States Gift Tax Return – must be filled out and filed with that year’s tax return.   But NO tax is due.

3. The recipient of said gifts whether it be $13,000, $100,000 or $500,000 does not pay tax on the money ever, at all.

Let’s step back and define what a gift is for IRS purposes:  It’s something that is given and nothing is received in return. It is complete as a gift. Loans are not gifts.

What  are some of the reasons people give gifts?:

  1. They are generous and kind.
  2. They want to help a loved one with expenses such as a down payment on a house,
    education costs, or a vacation.
  3. They are very wealthy and want to reduce the size of their estate and therefore, estate taxes.
  4. They know they won’t spend all their money during their lifetime and want to
    share it with their loved ones before they die.

Examples:
1. You decide to give $13,000 each to your four grown children for Christmas.  No tax is due and no gift return is filed.

2. A couple gives $100,000 to their daughter to assist in her purchase of her first home. A gift tax return for $74,000 ($100,000 –  $13,000×2) would be filed with that year’s tax return.  In subsequent years, any gifts given over the exclusion amount will be added to the $74,000. If in any given year the total lifetime gifts reaches over $1,000,000, tax will be due.

About the author

Cathy Curtis, CFP®

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