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Tax Tips - Save on Taxes

Gifts and Gift Taxes

Making gifts, whether to a family member or a charity, is a great strategy for shifting income to other family members. Gifts can be made in cash, by check, as appreciated securities (stocks, bonds or mutual funds), or as property (real estate, motor vehicles).

Woman at DeskWhen the person making the gift (the “donor”) makes a gift, they make a gift of their original cost basis the to person receiving the gift (the “donee”). The cost basis of cash or a check is the value of the cash or check when gifted. The cost basis of securities is what the donor originally paid for the securities. The cost basis of property is the price originally paid for the property, plus the costs of any improvements made.

In 2018 and 2019, the annual gift tax exclusion amount is $15,000 per recipient. For 2014 through 2017, the annual exclusion had been $14,000. What this means is that each individual may give up to $15,000 to another individual each year, without incurring any gift tax liability. A married couple may give up to $30,000 to an individual (a split gift of $15,000 each). A married couple may give up to $60,000 to another married couple (a split gift of $15,000 each, to each spouse). There is no limit to the number of individuals who may receive gifts of up to $15,000 during each year.

Any gifts made over the $15,000 annual exclusion amount must be reported on Form 709 by the donor (not the recipient), and are subject to the gift tax, which can range from 18% to 40%. Married couples may not file a joint Form 709 gift tax return. Each spouse is responsible for filing his or her own Form 709 return.

A taxpayer may make a gift of appreciated securities to another family member with limited gift and income tax liabilities. Ideally, the recipient will be in a lower income tax bracket than the donor, and thus be able to recognize the gain on the sale of the appreciated securities while incurring a smaller income tax liability.

The IRS allows a special provision whereby an individual may prorate their contributions into a §529 Qualified Tuition Plan (QTP) over a five-year period for purposes of claiming the gift-tax annual exclusion. In essence, this IRS provision allows for the acceleration of four (4) gift contributions of up to $15,000 each into the current year. The only limitation is that the donor is prohibited from making any additional tax-free gifts to that recipient for the next five years.

This provision allows taxpayers to contribute up to five times the amount of the annual exclusion, or up to $75,000 (five (5) gifts of $15,000 each; up to $150,000 in the case of split gifts made by married couples) into a §529 Plan for the benefit of each of their children and/or grandchildren, or to other individuals whom the donor designates.

The gift of up to $75,000 into a §529 Plan does not have to be made all at once, either. The donor is allowed to make periodic contributions of whatever amount at whatever frequency, so long as the total amount contributed into the §529 Plan does not exceed $75,000 in that year.

All prorated contributions made into §529 Plans must be reported on Form 709.

I would be happy to discuss gifts and gift taxes with you at your convenience, or to prepare a Form 709 Gift Tax Return on your behalf.

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