Do I have to pay a gift tax if I give someone over $14,000 per year?
As lawyers often tell clients, it depends! First, let's clear up a common misconception. An individual can give anything he or she wishes to give to any third party, provided the third-party accepts what they are gifted. As a general rule, there are no restrictions on making a gift, A restriction is, however, different than a consequence. There are many potential consequences. This is where the confusion exists regarding the $14,000 amount, which is thrown around so often.
For gift tax purposes, there is the potential to have to pay a gift tax upon certain gifts. Additionally, there is a lifetime exclusion amount an individual may gift without incurring a gift tax. For gifts made in 2015, this amount is $5,430,000 per individual ($10,860,000 for a couple) and can be used to make gifts during an individuals lifetime, without paying any gift tax. The gifts are cumulative, so over a lifetime it is possible to make multiple gifts without incurring a gift tax. Gifts can be in cash or real and personal property, of all types.
Any unused exclusion amount can be used at an individuals death. This is huge number for most people. For example, if an individual were to give away $1,000,000 during his or her lifetime, upon his or her death (assuming 2015) he or she would have the balance of $4,430,000 available in the form of an estate tax exclusion to shelter any assets in the taxable estate of the individual at death from estate taxes.
There are a few items to note:
The lifetime exclusion amount and the amount available on death, is adjusted for inflation annually. The amount to keep it mind is what is the total amount available during the year of death and then subtract the lifetime gifts (other than the $14,000 "annual exclusion", discussed below) to arrive at the amount of the exclusion available to the decedent's estate at death.
In addition to the lifetime exclusion, each year a person may give away an additional amount (referred to as the annual exclusion), which is currently $14,000. Thie annual exclusion is adjusted annually for inflation ("kind of"). The amount of $14,000 may be gifted to multiple parties. So, if you wanted to benefit 10 individuals you could give away $140,000 without incurring a gift tax. The annual exclusion gifts do not use any of the lifetime exclusion and are in addition to the lifetime exclusion amount. For a couple, they can each make a gift of $14,000 per person. A couple who wanted to benefit their three children, who are married, along with 9 grandchildren ( a total of 15 individuals) could give away a total of $252,000 per year ($14,000 X 9 for the husband and $14,000 X 9 for the wife) and this would not consume any of the lifetime or death exclusions.
The annual exclusion gifts can be made outright or in a trust (although this can be a bit tricky) so long as they are in the form of a "present interest" (a legal term).
When assets are gifted the assets in the hands of the donee (the person receiving the gift) have the same basis as in the hands of the donor. It is important to select carefully the asset which is to be gifted to insure the donee of the gift is not paying an unnecessay income tax when the gifted asset is sold. Cash is the best candidate for these types of gifts, if possible, as it has a basis equal to the value of the gifted cash. If the assets (with low basis, as opposed the value on the date of the gift) are not gifted, but instead held until death, the heirs receive the assets with a new basis equal to the date of death valuation. It may be best to avoid gifting of assets with low basis and instead holding on to them until death, when they will receive the basis adjustement. A careful analysis of what gifts should be made should be undertaken before a gift is made. We often see parents giving their home to their children to avoid having them be a countable assets for Medicaid. When this gift is made the parent is giving the child his or her basis and this approach may be an unintended consequnce to be avoided.
Gifts to charites do not count against the $14,000 annual exclusion or the $5,430,000 life time exclusion or the $5,430,000 estate tax exclusion.
We are talking about Federal law and not state law. States vary from state to state. Colorado has neither a gift tax or an estate (inheritance) tax.
As you can see there are many issues to think about before making lifetime gifts. You may want to seek professional advice before making large gifts.