Giving gifts to your children or grandchildren every year can be very important to you. Like many financial decisions, gift giving comes with tax consequences. However, understanding how the gift tax works, as well as the exemptions that are available, can save you money. If you plan it right, you can give your children $10,000 or more each year, without paying taxes.
The IRS imposes a gift tax on “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.” There are exceptions, such as when the gift is for medical expenses or college tuition. Gifts to a spouse, qualified charity or political organization are not taxed, but instead are actually deductible.
The annual gift tax exclusion
Everyone is entitled to an annual exclusion from the gift tax, per recipient. The amount of the exclusion in 2014 is $14,000. This means, you are able to give each child or grandchild a gift, up to $14,000 each, every year without incurring taxes. Even better, if you are married and your spouse combines his or her gift tax exclusion with yours, each gift could be up to $28,000.
How to make gifts for more than $28,000
If you want to make the most of your annual gift tax exclusion, you can spread your gift over two years. The gift tax exclusion is based on a calendar year. This means that, for example, you can give a gift of $10,000 in December and then another gift of $10,000 in January. By separating the gifts this way, both gifts would be tax free.
Not all gifts are qualified for the exclusion
There is a very important requirement that must be met in order for a gift to be qualified for the annual gift tax exclusion. This exclusion only applies to what is known as a gift of “present interest.” This means, the gift must give the recipient an unrestricted right to “immediate possession, use and enjoyment.” So, a check that your child can spend however they desire, would qualify. However, a gift placed in an irrevocable trust, which does not allow your child to receive the money until he or she reaches a certain age, would be a gift with a future interest. This type of gift does not qualify for the gift tax exclusion.
If you have questions regarding gifts and their tax consequences, or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.