With the holiday season upon us, you may be considering making an end-of-year financial gift. Because there is so much confusion about the federal gifting rules, I sat down with Steven Rea and Tony Butler of Kilpatrick, Rea & Associates, CPA, PC, to discuss the basics.
How much can an individual gift in 2015 without having to file a gift tax return?
An individual can gift up to $14,000 in cash per person during 2015. This is called the “annual exclusion amount” and it changes from time to time. An individual can make an unlimited number of cash gifts without having to file a gift tax return as long as no gift exceeds the annual exclusion amount for that year. For example, Grandmother Jones could gift $14,000 to each of her 12 grandchildren for Christmas 2015 and not have to file a gift tax return.
A married couple can each individually gift $14,000 in cash to any person during 2015, and they may each gift to the same person. Using the previous example, Grandmother and Grandfather Jones could each gift $14,000 to every one of their 12 grandchildren for Christmas 2015 without having to file a gift return.
What happens if an individual makes a gift of more than $14,000 to someone in 2015?
The individual must file a Form 709, a gift tax return, with the IRS.
Are there any exceptions?
Certain payments for medical or post-secondary tuition expenses of another do not count as a gift if payment is made directly to the service provider.
If an individual has to file a gift tax return, does that mean he or she needs to pay gift tax?
Under current tax law, a lifetime exclusion amount is established to determine how much can be excluded from gift or estate tax. The lifetime exclusion amount applies to both gift and estate tax combined. Any unused gift tax exclusion at the time of death is available to be used for estate tax exclusion. The purpose of Form 709, the gift tax return, is to keep track of the amounts gifted in excess of the annual gift exclusion amount during an individual’s lifetime. For 2015, the lifetime combined gift and estate tax exclusion amount is $5.43 million.
As an example, assume Grandmother Jones gifts $20,000 in cash during 2015 to her son, John. Because the 2015 annual exclusion amount is $14,000, Grandmother Jones will need to file a gift tax return with the IRS indicating that she gifted $6,000 in excess of the annual exclusion amount in 2015. Assuming also that this is the only time in her life that Grandmother Jones has made a gift greater than the annual exclusion amount, she would not owe gift tax at the time of the gift because her lifetime gifts in excess of the annual exclusion amount only total $6000. If Grandmother Jones then passes away at the end of 2015, while the lifetime exclusion amount is $5.43 million, deducting the $6000 would leave her with $5,424,000 million of lifetime exclusion remaining to offset any estate taxes.
Does the gift recipient have to pay tax on the gift?
How much will individuals be able to gift in 2016 without having to file a gift tax return?
$14,000 per person. The annual exclusion amount will not change from 2015 to 2016.
Please note that the above discussion applies only to gifts of cash. Gifts of bonds, securities, real estate, and other non-cash assets require a more complex analysis.
Steven Rea, CPA, is President of Kilpatrick, Rea & Associates, CPA, PC, 100 Crescent Centre Parkway, Suite 660, Tucker, GA 30084. (770)455-8706 http://www.kilpatrickcpa.com
Tony Butler, EA, is Senior Tax Director of Kilpatrick, Rea & Associates, CPA, PC.