In estate planning, one common tactic individuals consider to avoid probate is adding their children…
Unless your parents handed you a small fortune, like more than $15,000, the chances that they have to pay any gift taxes are very low, according to a recent article, “All About Gift Taxes: Do I Pay Tax on Gifts From Parents?” from Wealth Advisor .
If you are lucky enough to have such generous parents, make sure they understand the tax consequences of such a large gift.
In 2018, a person can give up to $15,000 per person, without any tax ramifications. However, even if your parent hits that level, they may only be required to file some paperwork. Your parent generally won’t owe an actual out-of-pocket tax payment, unless their gifts for the year are beyond the lifetime gift tax exclusion. For tax year 2018, that number is $11.18 million, and $22.36 million, if married filing jointly. The exclusion goes up to $11.4 million in 2019 and $22.8 million, if married filing jointly.
It’s possible that the IRS may impose a gift tax on a person who transfers money or property to another person, without getting something of at least equal value in return. However, this depends on the amount, and the IRS typically doesn’t go after any gifts that don’t hit the annual gift tax exclusion.
The annual gift tax exclusion is $15,000 and $30,000 for married couples filing jointly in 2018, which means your parent can give $15,000 to any person without creating a tax liability. If, for instance, a parent gives you $20,000—that would be a taxable gift. There’s most likely no tax, but he must file a gift tax return and fill out IRS Form 709, so the government can track the parent’s lifetime gift tax exclusion.
The IRS recently stated that the annual gift tax exclusion for tax year 2019 will stay at $15,000 for individuals and $30,000 for married couples filing jointly. However, the lifetime gift tax exclusion will increase to $11.4 million.
The IRS never taxes some specific transfers of cash or property, regardless of amount. You can avoid gift taxes when making gifts to a spouse, political organizations, or paying tuition and medical expenses on behalf of another.
When you pay for someone’s tuition or medical bills, send those payments directly to the institution to avoid any issues with the IRS. If you send it to the student or patient first, there will be some extra paperwork and it may also reduce their lifetime gift tax exclusion. If a gift creates an actual tax bill from the IRS, the person responsible for paying it would be the donor.
There are many ways to avoid the gift tax, such as smart estate planning strategies, creating a trust, and leveraging the exclusions for giving money to students. These can be effective, if parents invest in a 529 college savings plan for a child.
When a parent does owe out-of-pocket gift taxes to the IRS, the rate can be 18% to 40%. However, the IRS has specific rules and allows some exceptions, when it comes to gift taxes. For example, each year parents can make a lump sum contribution toward a 529 plan up to five times the annual gift tax exclusion, while avoiding a gift tax, as long as they make a special election. The special election means parents can ask the IRS to treat this contribution, as if they made it evenly throughout a five-year period.
In a slightly different situation, if you have recently received an inheritance from a parent, then you need to find out if you have an inheritance tax bill. An estate planning attorney will be able to help you with this.
Parents who want to provide their children with significant gifts should also meet with an estate planning attorney to create a strategic plan to manage their tax liabilities. This should be part of an estate plan.
Reference: Wealth Advisor (November 30, 2018) “All About Gift Taxes: Do I Pay Tax on Gifts From Parents?”