Giving family members large gifts may fall under some tax laws which you should be aware of before giving away some of your assets. A gift includes money, property, or other assets that you give away to someone while receiving little (less than fair market value) or nothing in return. When certain circumstances are met, you could be liable for gift taxes if you exceed your state’s annual or lifetime gift exemption amount, to that individual.
The person you give a gift to does not need to report it as income, as you are liable to pay taxes if you reach your annual gift threshold. As of 2019, this amount was $15,000 and applies to each individual you give a gift to. So, if you give three children $15,000 in one year, you will not have to pay the gift tax. If you and your spouse gift $30,000, you will also not have to pay the gift tax because you can combine your exemptions.
For each individual you give a gift to, you cannot exceed $11.4 million, for 2019, in your lifetime. Any amount over $11.4 million will be subject to the gift tax. These tax rates range from 18 to 40%.
It’s also important to note, that if the person you gift an asset to decides to sell it after it has appreciated in value, they should only have to pay income tax or capital gains tax on the amount it appreciated by.
Generally, your gifts may not be deducted from your income taxes, unless it was a valid charitable contribution that does not exceed the annual charitable gift amount.
One reason to give a significant gift to someone, would be to decrease your estate below the estate tax limits for the time being. The exemption is also $11.4 million, so you could gift enough to put your estate value below the estate exemption limit to avoid taxes for a while. This amount will be taken out of your lifetime exemption limit, as the gift tax and estate tax exemptions come out of the same $11.4 million.
There are a few gift tax exemptions to be aware of, since these can amount to significant sums of money that do not affect your lifetime or annual exemption limits:
- Education expenses
- Medical expenses
- Gifts given to your spouse unless they are not a US citizen, in which case you can only gift $152,000 per year
- Gifts for a political organization
- Items given to a dependent
If you’re unsure about how to use the gift tax exemptions to your benefit, or you want to start giving donations to a charity and are not sure how to structure the payments, consult with an estate planning lawyer. They understand federal and your state taxes and can help ensure your gifting actions are lawful and with minimal or no tax payments.