Many of our customers want to know how they can make financial gifts to other people during the year. Often this comes in the form of a quick phone call or a question on the street, “How much can I give my kid this year?” The quick answer, for 2014, is up to $14,000.00 per person.
For those willing to stay on the phone or stand out on the sidewalk for a few more minutes, the question warrants a bit more explanation. We appreciate that our customers are so generous, and that they are considering the tax consequences of their giving. However, as with all things related to the Internal Revenue Service, there are some additional details to consider. And those details reveal the advantages and opportunities for maximizing both your generosity and tax planning.
There are two key categories for limits to gifts that you should know about: annual and lifetime limits. Congress may, and has, modified these limits from year to year. As the amounts change each year, it is important to identify the current limits before you make a gift.
Here are the current limits for 2014:
Annual gift limit $14,000 per individual
Lifetime gift limit $5.34 million
The annual gift limit, sometimes also called the “annual exclusion amount,” is the maximum amount one person can give to another person in a year without having to pay gift tax or file a gift-tax return. Gifts in excess of the annual exclusion amount can count against the lifetime gift limit, sometimes also called the “unified credit” or the “basic exclusion amount.”
So what does this mean for you? The first thing to note is that it is the donor (the person making the gift) who is potentially subject to tax. The recipient most likely will not be burdened with worrying about the tax implications of receiving the gift because, generally, gifts are not taxable income.
The second point is that the gift can be a check, stock or any other asset. Most people prefer writing checks; it makes clear who the donor and recipient are, as well as the amount and the date of the gift. A gift can be made of other assets, however. If the value of the gift is uncertain or possibly near the annual limit, it may be best to file a gift-tax return to be safe.
A third important detail is that the annual exclusion amount applies equally to recipients of your gift. As a result, the $14,000 limit in 2014 is the same for a gift to a child, a friend, a neighbor, another family member and so forth. It does not matter whether that person is related to you or not, the amount remains the same.
Furthermore, the annual gift limit is $14,000 per person, which also means that a married couple can give up to $28,000 (or $14,000 each to one person), if structured correctly.
For example, Mom can give $14,000 to daughter, and Dad can give $14,000 to daughter; and then Mom can also give $14,000 to son-in-law, and Dad can give $14,000 to son-in-law. In doing so, Mom and Dad effectively give $56,000 from parents to children without having to pay gift tax or file a gift-tax return. Moreover, because you are not limited in the number of these smaller gifts you can make, as long as it is under the annual exclusion amount you can make as many of them as you want. Here’s an example:
Gift to one child: $14,000
Gift to another child: $14,000
Gift to a friend: $14,000
Total gifts: $42,000
In the example above, the amount of total gifts in the year is $42,000, but it still meets the annual limit of $14,000 per person. By not exceeding the individual annual limit, you can make such gifts to as many people as you want. In addition, by not going over the annual exclusion amount, you do not reduce your lifetime gift limit.
It’s important to note what happens if you give individuals a higher amount than the annual limit. Here’s an example:
Gift to one child $54,000 ($40,000 over $14,000 annual limit)
By exceeding the individual tax-free gift limit by $40,000, you would then reduce your lifetime gift limit by $40,000. You would need to file a gift-tax return for the gift, to give the IRS notice of the reduction in your lifetime limit.
Remember – there are many more details and possibilities for gift-giving and each person’s situation is unique. In light of these intricacies and considerations, we like to talk to our customers a little bit longer to determine what their goals may be and what strategies would work best to achieve them.