The end of another year is upon us. As with each year, this year ends with the holiday of giving, Christmas, and so our minds turn to gifting. The most common questions that people have when it comes to gifting is: How much can I gift before I have to pay tax? And, how much can someone receive before they have to pay tax? Much to most people’s surprise, few gifts would ever result in the giver of the gift paying gift tax, and the recipient of the gift never pays gift tax.
I have written numerous times about gifting and gift tax. I can’t tell you how many people come to see me and tell me that they cut out my articles and have been saving my articles for years. People tell me that they have hundreds of my articles saved.
Of course, I am flattered by this fact, and it affirms for me my initial thoughts for writing these articles. If I simply ran an ad saying “I’m great. Come to me!,” I’d be no different than any other advertiser. But by giving people information, I introduce myself to them, letting them know what services I provide, and I provide them with information. I also let them know what I know about my practice area.
But I can tell you that no matter how many articles I write about gifting and gift tax, I will never get the message of truth about these issues to the masses. Most every person who comes to see me tells me their belief that they can only gift $15,000 (or some figure, which ranges anywhere from $10,000 to $15,000) a year without paying gift tax. Oddly, though, people rarely understand when a gift occurs. For instance, a person will tell me that they can only gift $15,000 a year, then they’ll tell me that they gave their house to the children.
A gift occurs anytime you give something of value away and do not receive that thing’s value. For instance, if I write you a check for $15,000, and you give me nothing, then I have made a gift of $15,000. If I transfer my house to you and my house is worth $400,000, then I have made a gift of $400,000. If I give you my house worth $400,000, and you give me $200,000, then I have made a gift of $200,000.
When people talk about gift tax, they are talking about federal gift tax. There is no New Jersey gift tax. For federal gift tax, there is an amount that a person can give away each year to an unlimited number of people. This exclusion from the gift tax is called the “annual exclusion.” The current annual exclusion gift is $15,000. This is where people get the “I can only give $15,000 a year without paying gift tax” rule from; however, this is only half of the rule.
Each person receives a credit equivalent against gift tax of $11,200,000. What this means is, you would have to give away, at least, $11,200,000 before you would ever pay gift tax. Because of the annual exclusion, a person can give away $15,000 a year to an unlimited number of people without reducing his $11,200,000 lifetime credit.
For example, if I gave away $15,000 to 1,000 people, then I would not reduce my $11,200,000 lifetime credit at all. If I give away $16,000 to the 1,001st person, then my lifetime credit against gift tax will be reduced from $11,200,000 to $11,199,000.
So, unless you are worth more than $11,200,000 (and that would certainly only be the top 1% of our society), then you have no chance of ever paying gift tax. You simply do not have enough money to ever pay gift tax.
On the other hand, gifts can cause issues for Medicaid eligibility. Any gift that you make will count against your eligibility for Medicaid for five years following the gift, but that is a discussion for another day. The lesson of today’s article is, don’t let gift tax get in the way of your giving.
The season of giving is perfect for planning ahead. Thoughtful estate planning ensures gifts and assets are distributed wisely while safeguarding your family.