Give it Away, Give it Away, Give it Away Now
Forgive the Red Hot Chili Peppers song reference, but it was the first thing that came to my mind when I thought about gifting money to others. I have had many clients ask me about giving money to relatives recently (around the holidays), and there are certainly some misconceptions out there about what you can and can’t do when giving money to someone else.
Gifting to a charity is somewhat obvious, and in most cases relatively straightforward. However, most of the recent questions I have heard centered around giving to individual relatives. The short version is that you can give anyone up to $14,000 per year (the annual gift exclusion for 2016) with neither the giver nor the recipient paying any tax or penalties. Further, if you are married, you and your spouse can each gift $14k per year ($28k total) to as many individuals as you’d like.
Another good option for gifts to younger family members is an accelerated gift directly into a college savings (529) plan. With this strategy, an individual can give 5 years’ worth of gifts all at one time. So, for 2016 that would be $14,000 x 5 = $70,000. Note that this would mean no tax-free gifts to that recipient for the next 5 years.
Also, unless you’ve recently won the over $1 billion Powerball (!), most of the above probably does not matter all that much to you. Believe it or not, an individual is exempt from federal estate and gift taxes in 2016 as long as he or she does not exceed $5.45 million in lifetime gifts (over the annual exclusion) plus the value of his or her estate at death. Once again, if you’re married and follow the proper steps, you can double this amount to $10.9 million in 2016. So, even if you gift over the annual exclusion amount (and have filed IRS form 709), then most are still not going to pay any federal estate or gift tax. If this is in fact an issue for you, please come talk to us at Meridian Financial Partners right away!
Keep in mind these numbers are moving targets, and appropriate steps should be taken to adjust for changes in these rules. We try to avoid talking politics in our business, but most Republicans want to repeal the estate tax altogether. The two top Democratic presidential candidates want to lower the exclusion amount and increase the top estate tax rate. As recently as 2003, anything over $1 million was considered taxable, so things can and have changed quickly.