How Much Can I Gift

 Almost every week I get a client asking me how much he can gift before he has to pay gift tax or before the person to whom he gives the gift has to pay gift tax.  Most people believe that they can only gift a limited amount of money to a person before some form of tax is owed.  The amount that I commonly hear ranges from $10,000 to $14,000 a year.

If you believe that you can only gift an amount in this range every year before you pay a tax or before the person to whom you gift the money pays a tax, you aren’t alone.  But the fact of the matter is, it is highly unlikely that you will ever pay a tax on a gift that you make.  In fact, it is so unlikely that a tax will be owed on a gift that any person will make that it is more accurate to say there is no tax for making a gift than to say there is a tax.

Technically, there is a federal gift tax that can be imposed on certain gifts.  There is no New Jersey state gift tax laws, so New Jersey never imposes a tax on a gift.

Under the federal law, a person can gift $14,000 a year to an unlimited number of people without reducing his lifetime exclusion against gift tax.  The $14,000 amount is commonly called the “annual exclusion” gift amount.  In other words, Mr. Smith could gift $14,000 a year to everyone on earth without reducing his lifetime exclusion against gift tax.  The recipient of the gift does not have to be related to Mr. Smith.

The reason why I say that effectively there is no gift tax is due to the amount of the lifetime exclusion.  For 2016, the lifetime exclusion amount against federal gift tax will be $5,450,000.  The lifetime exclusion is an amount that a person can gift over their lifetime in addition to the other amounts that he can gift tax free.

If Mr. Smith gifted $14,000 to ninety-nine people and gifted $15,000 to one person, Mr. Smith’s lifetime exclusion amount would be reduced from $5,450,000 to $5,449,000.  Since the one gift that Mr. Smith made exceeded the annual exclusion amount by $1,000 that $1,000 would reduce his lifetime exclusion amount by $1,000.

Unless you intend to gift more than $5,450,000 in your lifetime, you do not have to worry about gift tax.  Since most people will never gift anywhere near $5,450,000 over the course of their lifetimes, most people will never pay gift tax.

The recipient of a gift never pays gift tax.

Technically, if you gift more than $14,000 a year to any one person, you must file a gift tax return, which is IRS form 709, but no gift tax will be owed.  If you do no file a gift tax return, the penalty for not filing is based upon the tax that would have been owed, but since a tax would not be owed in the vast majority of cases the penalty is not very harsh.

Now there may be other reasons why you should think twice before making a gift.  If you are seventy years of age or older, the possibility that you will been long term care is very real.

Any gifts that you have made during the past five years could affect your eligibility for the Medicaid program.  Medicaid is a federal-state medical payment program for needy individuals.  Gifts made up to five years prior to filing an application for Medicaid can result in a person being rendered ineligible for Medicaid for a period of time.

But worrying about paying a tax is not a real reason to worry about making a gift.  If you don’t believe me, ask yourself this simple question:  How many people do you know who have ever paid a gift tax on a gift that they have made?  I bet you don’t know anyone.  On the other hand, how many people do you know who have paid income tax?  I bet almost everyone you know.

From a practical standpoint, there is no tax on gifts.

A Must Read Book

As those of you who read my column on a regular basis know, I wrote a book on elder law entitled, New Jersey Elder Law: A Resource and Planning Guide.  American Law Media (ALM) is the publisher of my book.  ALM also publishes the New Jersey Law Journal, New Jersey’s premier legal periodical.  My book is available for purchase through the following website: http://www.lawjournalpress.com/.

The first edition of the book was published in October 2015.  The second edition is now available.  The second edition contains the most up-to-date discussion of legal issues affecting the elderly and disabled in the state of New Jersey that you could find in any book.  The second edition also contains numerous forms that were not released in the first edition.

You will find invaluable forms and discussions addressing estate planning (Wills, powers of attorney, living wills), Medicaid planning (strategies and techniques for obtaining Medicaid eligibility), and guardianship law.  There are a great many people who are caring for an elderly or disabled person, and there are numerous legal issues affecting these populations.  Having worked in this area of the law now for over fifteen years, I can honestly say that this book will help you better understand a great many legal issues.

Caring for another person, no matter their age, is taxing.  There’s not just the physical strain of the work, but perhaps even more stressing, there’s the anxiety associated with caring for a loved one.  We want the person to not need the care we provide, for them to be self-sufficient.  We worry about them.  We think about their fate if we were unable to continue to provide the care they need.

My book certainly cannot take away all the stresses and anxieties associated with caring for a loved one, but I do believe that there are a great many legal issues of which people in these populations should be aware.  Here is an excerpt from my book:

 

“A general durable power of attorney is one of the three, fundamental estate planning documents, along with a last will and testament (Will) and an advance health care directive (living will). Of the three, it could probably be said that a general durable power of attorney is the most important document.

When you hear the phrase “power of attorney,” clients are most often referring to a general durable power of attorney for financial decisions. Sometimes, a client is referring to a living will, which is discussed in Chapter Two, but more often than not they are referring to a general durable power of attorney. Accordingly, when used in this book, the phrase “power of attorney” means a general durable power of attorney for financial decisions.

A power of attorney is probably the most important estate planning document because it can be the most helpful document for the client. A Will is a document that is not even effective until after the client dies; therefore, a Will is really a document for other people, since the person making the Will must be dead before his Will has any effect at all.

While a living will can be very helpful and is very important, many health care providers will abide by the decision of close family members when it comes to health care decisions for a patient. Assuming all family members agree as to the proper course of treatment for the patient, the family may get by without having a living will signed by the patient.

But, without a power of attorney, no family member—not a spouse, not a child, not a sibling—is going to be permitted to make financial decisions for a now-incapacitated person. There is no bank or brokerage house that is going to honor the financial decisions of a family member who cannot present a power of attorney document duly executed by the client, not even if that family member is a spouse or a child.”