A Gift Tax Primer
Over the past five years, I have prepared all the gift tax returns for Chambliss’ tax clients. Gift taxes can become quite complex and vary based on a taxpayer’s individual circumstances. There is a lot of confusion and misinformation that I regularly run across, so I thought it would be helpful to share my experience and provide an explanation of the basics.
Why is now a great time to make large gifts?
Each taxpayer is currently able to give away $11,580,000 total during life and after death without paying gift or estate taxes. This amount is significantly higher than it has been in recent history, and the cap is set to go back down to $5,490,000 after December 31, 2025. Tax regimes change frequently with changes in political party, making tax planning more difficult than ever. If you are not a gambler, now is a great time to go ahead and make a large gift while the current high level estate tax exemption is in place.
Who has to file a gift tax return?
The person who makes the gift files the return, not the person who receives the gift. If you receive a gift, it is “free” money that you do not have to report on your tax return. Gifts in excess of $15,000 must be filed. See the annual exclusion amount information below for more information.
What is a gift tax return?
A gift tax return is a running record of all the gifts you have given over your lifetime and the amount of unified credit and GST credit you have used up. Typically no actual tax is due with a gift tax return because the credit amounts are currently so high.
What is the unified credit?
The unified credit is a tax credit that is used up during your life, and after your death as you make gifts or bequests. It represents the amount of tax you would pay on the first $11,580,000 if it were taxable. Since it is not taxable, you use up the credit rather than paying the tax.
What is the GST (Generation Skipping Transfer) tax credit?
The GST tax credit is used up during your life and after your death as you make gifts to your grandchildren or to trusts that have the potential to benefit multiple generations. It is calculated in the same way as the unified credit.
What is the “annual exclusion” amount?
An annual exclusion is the amount of a gift you can give to an individual before having to file a gift tax return. For 2020, the amount is $15,000. For example, if you and your spouse want to gift cash to your daughter and her spouse, you could give them a total of $60,000 — $15,000 to each of them from each of you — without filing a gift tax return. You do not use up your unified credit on gifts below the annual exclusion amount.
What information goes on a gift tax return?
- Your name, address, and social security number
- The names and addresses of any donees
- The amount, date, and description of each gift you make
- If you make a gift to a trust, a copy of the trust instrument
- A running tally of all previous gifts and previously used credit amounts
- A list of all charitable gifts you give — this does not use up your credit and is merely informational
- Any legal paperwork related to gift transfers
- Valuations of the gifts:
- Cash is most straightforward, no valuation needed
- Fair market value and cost basis of stock gifts
- Appraisal or valuation of real estate or business interests
Are there any drawbacks to gifting now rather than bequeathing something in your will?
When gifts are made, their current value and original cost basis are transferred to the new owner. Gifting highly appreciated assets can result in higher taxes for the donee. For example, if you have stock that has greatly increased in value over time, you gift it to your son, and he sells it right away, he will pay a lot in capital gains taxes. However, if you leave that stock to him in your will, it will be revalued (a “step up” in basis) at your date of death. If he sells it right away after your death, he will pay little to no capital gains taxes.
Another drawback is the loss of control of the asset. For instance, if you gift your child a business interest, you must hand it off completely. In order for a gift transfer to be complete, you must not have any control over the asset. If you are uncomfortable with that prospect, wait until later.
Are there ways to avoid filing a gift tax return?
If you make a payment directly to a medical facility on someone’s behalf, the payment does not need to be reported on a gift tax return. You can also pay for an individual’s tuition directly to the educational institution and not file a gift tax return.
In addition, you can make a lump-sum contribution to a 529 plan equal to five times the annual exclusion amount (currently $75,000) and make an election to spread the gift evenly over five years. You will need to file the gift tax return in the initial year, but as long as you don’t make additional gifts, you will not have to file additional returns for the second through fifth years.
How can Chambliss help?
Making gifts is an important part of many people’s estate planning process. If you have any questions or would be interested in fitting gifts into your overall estate plan, please contact me, Rachel Ragghianti, or a member of our Tax team.