By Adam Kornegay, adam@apcplan.com
The holidays are upon us, which probably means that the giving (or receiving) of gifts is on your mind (or should be!). Did you know that the taxman may have a part to play in your gift-giving plans? Believe it or not, your gifts are potentially subject to a gift tax as high as 40%!
The gift tax was first implemented in 1932. The intent was to prevent wealthy families from transferring income-producing property to family members who were in a lower tax bracket. Additionally, it stopped efforts to circumvent the estate tax (enacted in 1915). Unless certain exemptions are met, federal laws stipulate that donors must pay a gift tax based on the amount of the gift.
What kinds of gifts are potentially subject to gift tax? Any gift! If you give your friend $500 without him working for it (and you don’t expect to be paid back), that’s a gift! If you pay off your cousin’s credit card, that’s a gift! If you sell your car to your next-door neighbor for less than it’s worth, the difference is a gift! (There’s one key exception: payments made directly to a qualified educational institution or to a medical care provider for the expenses of someone else.)
So how do you avoid paying the gift tax?
One option is to stay below the annual exclusion. You are allowed to give any person gifts totaling $19,000 in a single year. It doesn’t matter how many people you gift to as long as you stay under $19,000 each. You could literally stand on the corner of Kingston Pike and Campbell Station and give every passerby $19,000 if you wanted to. If your wallet supports it, so does the tax code!
Married couples can also combine their efforts in a “split gift” tax filing to give a total of $38,000. By the way, there’s an unlimited exclusion for spouses to gift each other as much as they want.
If you go beyond $19,000, then what? You need to file a gift tax return but might not owe the tax. Why? Because gifts beyond the annual exclusion begin to use up your lifetime gift and estate tax exemption, which is currently about $14 million. This is the amount of total gifts you can give over your lifetime without paying gift taxes. Once the exemption is fully exhausted, all subsequent gifts above the annual exclusion are subject to gift taxes!
So feel free to make it a December to remember – just remember the annual exclusion, too!
Adam Kornegay is a CERTIFIED FINANCIAL PLANNER® professional and a Certified Kingdom Advisor® with APC Financial Planning, which is celebrating its 50th year of serving clients in East Tennessee and beyond. He can be reached at 865-690-1231 or adam@apcplan.com. APC Financial Planning is a registered investment advisor. The information provided is for educational and informational purposes only and does not constitute investment or tax advice, and it should not be relied on as such.