By Bonie Montalvo
The holidays are here, and the air is filled with wonder and cheer. During this holiday season we are more inclined to give, but, before you change someone’s luck, review the following to make sure that such change does not leave you at a loss.
• Generally, the person making the gift will be responsible for paying any gift tax.
• The person receiving the gift is not liable for any tax, and the gift received is not considered income to the recipient.
Gifts to your Spouse
• In Florida, if your spouse is a U.S. citizen, you can give him or her an unlimited amount of money or property without incurring any federal or state gift taxes.
• If your spouse is not a U.S. citizen, you can only give your spouse a certain amount each year tax-free. For 2018, you may give your “Non-U.S. spouse” $ 152,000 without incurring any taxes. Non-U.S. spouse includes non-U.S. citizen, non-resident alien, and resident alien.
Gifts Under $15,000 are Generally Tax-free
• For 2018, the annual gift exclusion amount is $15,000. Individuals can give up to $15,000 to anyone—and to as many people as they wish—without incurring any gift taxes, without having to report the gift, and without having to use any of their $11.2 million lifetime gift and estate exemption.
Married Couples Can Give Twice as Much
• Married couples can “split gifts” to double their annual exclusion, meaning that in 2018 they could give up to $30,000 tax-free. Couples making this election must (1) split all other gifts for that year and (2) file a gift tax return documenting the “split gift” election, even if no tax is due.
For example, a married couple would like to give $60,000 to their niece, who is graduating college at the end of December. The couple could give their niece $30,000 in December (tax-free for 2018) and $30,000 in January (tax-free for 2019) and while the couple would need to file a gift tax return, there would be no gift tax due.
Gifts Made Directly to Educational and Health Institutions
• Tuition or medical expenses paid directly to a medical or educational institution on behalf of a person, are generally tax-free.
A week after their niece graduated college she was to start medical school. While the married couple had already used both their 2018 and 2019 gift tax exclusions to benefit their niece, they nevertheless wanted to support their niece’s educational endeavors. For her first year of school, the niece had to pay $55,000, which included $35,000 for tuition and $20,000 for books, supplies, and room and board expenses. The married couple, wanting to benefit their niece—but not wanting to make any taxable gifts—decided to pay their niece’s tuition and made payment of $35,000 directly to their niece’s school.
Anyone wanting to take advantage of this should note that: payment (1) must be made to a qualified institution; (2) must be paid directly to the institution; and (3) must be made for tuition or qualified medical expenses.
Treatment of Taxable Gifts
• Gifts that do not qualify for any of the above, are taxable gifts. A gift tax return is required to report a taxable gift, but this does not necessarily mean that any tax will be due. Currently, we have an $11.2 million lifetime gift and estate exemption to offset up to $11.2 million in estate and gift taxes.
Throughout his lifetime X makes taxable gifts totaling $4 million. Each time a taxable gift is made X files a gift tax return but does not pay taxes on the gifts, however, the gifts decrease his lifetime exemption from $11.2 million to $7.2 million.
In 2018 X dies with a $5 million estate, this further decreases his exemption to $2.2 million. Since the combined amount of his estate and prior taxable gifts is not over the exemption amount, X will have no tax due at his death. However, if X had used his entire exemption, anything over that amount would have been subject to a hefty 40% tax.
Check for Changes
• The exemption limits change overtime, they can increase or decrease, and as such one must periodically check for changes.
• In 2017, the the lifetime exemption was $5.49 million, less than half of what it is today, and back in 2002 the lifetime exemption was only $1 million, with anything over $1 million subject to a 50% tax!
This Article does not constitute legal advice and may not be relied upon as such. Each individual’s facts and circumstances are different. If you have any questions regarding your particular situation, please consult with legal counsel.
Bonie Montalvo practices in the areas of estate planning, business succession planning, tax planning, and not-for-profit law. Ms. Montalvo has her LL.M. in Taxation from the University of Florida and is fluent in Spanish.