Too often, clients tell us they’re reluctant to give money because of the gift tax.
But they – and you - needn’t be. Yes, a federal gift tax exists. But no, it’s very unlikely you’ll ever have to pay it—even if you give away many millions of dollars.
There are two thresholds to consider when thinking about the gift tax. The first is the annual gift tax exclusion. Today, that exclusion is $19,000 per recipient per donor. You can give up to $19,000 to multiple people each year without having to report the gifts and without using up any of your lifetime gift tax exemption (discussed below).
If you give more than $19,000 to anyone in a given year, you’ll need to report the gift using IRS Form 709. But as I explain below, the gift is still not likely taxed.
That is because the of the second threshold: the lifetime gift and estate tax exemption. Today, that exemption is $15 million per donor. You can give away as much as $15 million in cash in total (on top of gifts that qualify for the annual gift tax exclusion) as gifts when you’re alive or as transfers as part of your estate after you die, and neither you nor your estate will owe federal gift or estate tax.
Keep in mind: the annual exclusion amount is per recipient. The lifetime exemption applies to all cash gifts you’ve made or cash you’ve transferred in your life and through your estate plan regardless of recipient.
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You’ll notice that the $15 million lifetime exemption sort of overstates your tax exposure, because you can give gifts of up to $19,000 to an unlimited number of people per year without the total amount ever counting toward the $15,000,000 lifetime exemption. Also note that these thresholds apply to an individual. The thresholds for married couples are effectively doubled: each spouse can give up to $19,000 to the same person in a given year, and their combined gift and estate tax exemption is $30 million.
In fact, most of us can give more than $19,000 and not worry at all about getting taxed on our gifts, as long as we never exceed the lifetime exclusion of $15 million. [CC1]
It’s also worth noting that in the cases where a gift tax is owed, it’s owed by the donor, never the gift recipient.
Other gift exemptions
On top of any cash gift that is at or under the $19,000-per-recipient annual exclusion, the following types of gifts are also exempt from the federal gift tax:
(1) Donations to qualifying charities; these have an unlimited deduction;
(2) Gifts to your spouse, as long as your spouse is a U.S. citizen when the gift is made;[1]
(3) Direct payments of qualifying tuition and medical expenses, if made directly to the educational institution or healthcare provider.
What about state gift taxes?
Only Connecticut has a state gift tax—a second and separate tax on gifts exceeding the same federal thresholds (a lifetime gift total of $15 million per Connecticut taxpayer, minus the $19,000 per recipient per year exclusion). Gifts over those combined thresholds are taxed at 12%.[2]
Non-cash gifts
Gifts of assets other than cash may have different tax implications. For example, a gift of appreciated assets transfers any unrealized capital gains to the recipient. Therefore, even though a gift of appreciated stock will not trigger a gift tax to the donor (assuming it’s below the annual or lifetime exemption amounts), the recipient may owe capital gains taxes if/when she sells the stock. This should not, however, be confused with the tax treatment of inherited assets. When appreciated assets are inherited, they receive an adjustment – a “step-up”- in basis. That is, the assets are re-valued as of the date of the owner’s death, which wipes out any unrealized gain up to that point.
You’ve Got a Lot to Give
Most of us have a lot of leeway for giving away cash, at least from the standpoint of federal taxes. But it always helps to run your annual gift planning by your financial advisor, who can help you minimize not only the taxes you pay now, but also the taxes that your estate pays later.
[1] Gifts to spouses who are not U.S. citizens at the time the gift is made are subject to an annual exclusion of $194,000.[2] Since federal tax law generally allows a deduction from federal gift tax for state gift taxes paid, the combined federal-state liability may make up some of that CT gift tax amount. CT gift taxes apply to cash, securities, and other intangible assets. Also note that non-CT residents may be liable for gift taxes on gifts of CT real estate or other CT-based property.