By Roberta L Nestor
Gifting in its traditional sense rarely has strings attached. When you purchase something for someone, and they don’t like the gift because it is the wrong size, color or brand, they can return the gift and or exchange it for something else they do like. Once you give the gift, it is a completed transaction. Gifting money is somewhat similar. You can give someone the gift of cash, but you can’t tell them what they can or cannot do with the cash. There are many myths surrounding “cash gifts” and what you can and can’t do.
Is there a maximum amount I can gift?
There are no limits on how much you can gift. There is however, a limit on how much you can gift without incurring a gift tax or without having to file a federal gift tax return. That limit is set each year and in 2020 (and 2021) you can gift up to $15,000 to each individual. A husband and wife could collectively gift a child or individual family member $30,000 and not have to file a gift tax return. This is called the gift tax exclusion.
What tax advantages do I have for gifting?
In short, none. Despite what many believe, there are no individual tax advantages to the donor – the person giving the gift. If you are gifting amounts over the $15,000 (for example, a home, larger cash gift or a business) you should be filing a federal gift tax return. While there may not be any tax implications, the IRS is tallying up gifts to make sure they don’t exceed the lifetime gift tax exemption. This is the total amount that can be given away by an individual over his or her entire lifetime to any number of people that would be tax free. The lifetime gift exemption is indexed for inflation and for 2020 it is $11.58 million and for 2021, it will be $11.7 million.
Will I have to pay any state taxes for gifting?
Over the last decade, all states except Connecticut has abandoned stand-alone gift tax. Connecticut imposes a gift tax for gifts exceeding $5.1 million in 2020, $7.1 million in 2021, and $9.1 million in 2022. That is unified with our estate tax with a top rate of 12 percent. Of course, this only applies to gifts that exceed the federal exemption amount of $15,000.
In summary, the rules are simple: There are no tax benefits to receiving or giving gifts of cash, and there are no tax implications of gifting cash unless you exceed the lifetime exemption of $7.1 million for the state of CT and $11.7 million for federal taxes in 2021. So, why do people give the $15,000 gift of cash each year? Some parents reach a stage in their life when they feel financial security and it is unlikely that they will not outlive their savings – in many cases they won’t even be able to spend it all. They may see their adult children struggling and in need of funds for many reasons, college for the grandkids comes to mine. Gifting can also be a means of removing assets from your estate. This usually comes into play when there is a potential long-term care situation. You must be cautious about gifting large sums of money based on fears of potentially needing long term care.
Whatever the reason, if you plan on gifting more than the $15,000 make sure you have guidance, especially when it involves a long-term care situation. Gifting a home or assets bring upon different rules and tax implications; you should always consult an attorney, tax advisor or financial advisor if you have questions about the potential implications of gifting.
Happy Holidays to All and Best Wishes for the year ahead!
Roberta L. Nestor is a financial advisor practicing at 759 Boston Post Road in Milford, CT offering retirement, long term care, investment, and tax planning services. She offers securities and advisory services as a Registered Representative and Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser. Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth. Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Roberta can be reached at Nestor Financial Network, 203-876-8066 or firstname.lastname@example.org.