How to Gift Money
The best tax protected ways to give a gift
One of the big changes brought by the 2018 tax reform is how much money (or stuff) one individual can give before getting taxed. Each person has a lifetime maximum they can give before those gifts are taxed. It used to be $5.49 million. Now it has risen to $5.6 million or $11.2 million for a married couple. However, there are still some rules around giving gifts that are good to know: The tax-smart way to give gifts.
In the past, one person could give gifts of up to $14,000 a year to a single recipient without having to notify the IRS. Now that ceiling has gone up to $15,000 a year per giver to a single recipient. So, you can give $15,000 to each of your ten grandchildren without needing to file Form 709. Moreover, your spouse can also give each of them $15,000 a year. Some experts still recommend filing for any large gift even if you don't have to—to protect your estate from going to probate and being scoured by the IRS when you die. However, it isn't legally required.
Once you exceed the maximum for the year, you have to notify the IRS of the gift. However, you do not have to pay tax on it until you have hit your lifetime gift max. So, if one generous grandparent gives a gift of $20,000 for tuition to a grandchild, they must file, but they will not have to pay taxes on it unless they had already given away $5,580,001.
The gift tax also may apply to other scenarios such as forgiving a debt, making an interest-free or below market interest rate loan, transferring the benefits of an insurance policy, some property settlements in divorce cases and other situations. In each of these cases, an amount exceeding $15,000 per year per individual must be reported.
Of course, if you're feeling constrained in their giving by these rules, you can feel comforted that you can be doubly generous after you die, through your estate.
Your estate is the value of all of your cash, stocks, property, etc. minus the cost of owed debt, taxes, fees to manage the estate. Before the tax reform, you could only give away an estate worth $6 million per person or $12 million per couple without any tax penalty. However, under the new law—which will be in place until 2025 unless Congress extends it—one person can gift an estate of up to $11 million; a couple can gift $22 million before any of it is taxed.
If you happen to have that kind of money in your estate, you may feel concerned that you will outlive the tax reform law it will revert to the smaller $6 million per person.
Fortunately, you don't even need to die to use this exemption. Some experts suggest if you're concerned that the exemption will go back to the old limits after 2025, you can give your kids the $11 million now. It may be that they will be taxed on whatever they get from your estate when you die, but they'll still have $5 million they might not have had otherwise. Whatever you give today is covered even if the law changes.
The reality is, most people are never going to have to worry about a gift that will be taxed. Unless you are a multi-millionaire, you can gift your car, your house, your land, your stocks and just about anything else without worrying about taxes. If you have that kind of money, there are smart ways to give gifts without them being taxable.
However, there are some scenarios in which the gift need not be reported. To some degree, it's all about how you go about it.
How to give a financial gift
Not all gifts are subject to the gift tax. For example, gifts of tuition and payment of someone's medical bills are not subject to the gift tax if you pay the institution directly, and don't give that money directly to the individual. So, you can cover someone's tuition (not books, etc.) by paying the school directly. Also, you can pay for someone's medical bills if you pay the hospital, without having to even worry about the gift tax. Whereas, if you paid the amount to the individual, the amount would be subject to the gift tax.
The downside of this may be that a student who was to receive grants or scholarships may not be eligible if the income of the gift giver is significantly above that of the student or their immediate family. So, one smart way to give tuition money is to have grandparents pay off loans after the child graduates.
Another approach is to give a large gift as a "loan" then forgive it in $15,000 increments each year. So, if grandma wanted to reduce her taxable assets by $1 million today, she could "loan" each of her five grandchildren $200,000. Since it's not a gift, it's not subject to the gift tax. Then she can outfox the gift tax by "forgiving the debt" in $15,000 increments over 13 years.
Putting the gift in "trust" will not change the lifetime tax exclusion amounts. Perhaps you could "loan" kids $11 million, forgiving it in $15,000 increments until you die when it becomes part of their inheritance.
There are many rules, and they are subject to change all the time. If you're planning to give a large gift and want some advice about how to do it correctly, please consult a licensed and credible tax advisor.