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Dollars & Sense: The Annual Gift Exclusion

By Roberta L. Nestor

It is somewhat interesting that the IRS “allows” you to gift money to family members each year.  The way this is phrased might lead someone to believe that there are some actual tax benefits if you give away cash to your kids!  There are many misconceptions when it comes to the IRC Section 2503(b) that allows you to exclude certain gifts that would otherwise be required to be filed on a gift tax return.

At the risk of oversimplification, in 2016 and 2017, the maximum gift you can give without having to file a gift tax return is $14,000.  Now for the misconceptions:

Gifting $14,000 will give me a tax break.  FALSE.  There is no tax benefit to the person giving the gift or to the person receiving the gift.

I can gift $14,000 to as many family members as I want.  TRUE.  For example, if you are married and you have a son who is married with 2 children, you could gift $14,000 to your son; $14,000 to his wife and $14,000 to each of their children.  In addition, your spouse can also gift $14,000 to each family member.  In this example between husband and wife, you would be able to gift $112,000 to your son and his family.

If I gift more than $14,000 and file a federal gift tax return I will have to pay taxes.  FALSE.  You will not have any tax liability unless, at your death you have exceeded the lifetime estate and tax gift exemption.

If I gift my $300,000 home to my son, I don’t have to file a gift tax return since it is not cash.  FALSE.  It doesn’t matter if the gift is cash or an asset.  If it exceeds the $14,000 annual gift exclusion you have to file a federal gift tax return.

The IRS is keeping track of how much money I gift.  TRUE.  The IRS is tracking your lifetime gifts to make sure they do not exceed the lifetime estate and gift tax exemption of $5.45 million (2016 limit) during your lifetime.  For most of us this should not be a concern.

The annual gift exclusion is relatively simple; however, you have to use extreme caution when there is a long term care situation.  Gifting a home could jeopardize eligibility for Medicaid and trigger the five year look-back period.  You should consult a tax advisor, financial advisor or attorney if you are unsure of the implications of gifting in a long term care situation.  Happy Holidays to All and Best Wishes for the year ahead!

Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services.  She also offers securities and advisory services as an 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 roberta@nestorfinancial.com.

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