Giving gifts to anyone, even your children, comes with tax consequences. So, if you want to give your child a gift each year tax free, it is important to understand how that gift will be taxed, and how to either decrease or eliminate taxes altogether.
What is the gift tax?
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 a few exceptions to this general rule, such as medical expenses or college tuition paid on someone else’s behalf. Also, gifts to a spouse, qualified charity or political organization are deductible, instead of taxed.
Are there exceptions?
Yes. There is an annual gift tax exclusion available to everyone. The amount of the annual gift tax exclusion is currently $14,000 per recipient. So, you can give each child as much as $14,000 each year without paying any taxes. If you and your spouse combine your gift tax exclusions, by giving a joint gift, you can give each child a total of $28,000 each year, tax free.
Can any gift be excluded?
Not all gifts qualify for the exclusion. The annual gift exclusion only applies to gifts of “present interest,” which means the recipient must be given an unrestricted right to “immediate possession, use and enjoyment” of that particular gift. A birthday check that allows the recipient to spend the money however they want, conveys a present interest. However, an irrevocable trust that prevents the beneficiary from accessing the money until they turn 21, for example, is a gift of a future interest, which is not excluded from gift taxes.
How to make the most of your annual exclusion
In order to make the most of your annual gift tax exclusion, understand that the exclusion is based on a calendar year. Although, you are not allowed to go back and claim an exclusion for a year you may have missed, you can spread a large gift over two or more years and still avoid gift tax consequences. For instance, if you want to give your son a $20,000 gift, you can write one check for $10,000 in December 2014 and another check for $10,000 in January 2015. Separating the gift in this manner means both gifts will be tax free.
Generation skipping taxes
Another type of gift tax you should be aware of is the generation skipping transfer tax. This tax is assessed on gifts passed on to a generation that is two or more levels below the generation actually transferring the property. In other words, if you transfer your property to your grandchild, the transfer would be subject to the generation skipping tax. A Generation Skipping Trust, sometimes referred to as a “dynasty trust,” is a type of irrevocable trust created to deal specifically with the generation skipping tax.
If you have questions regarding gifts, or any other estate planning needs in Fayetteville, please contact Sexton, Bailey Attorneys, PA online, or by calling us at (479) 443-0062.