Question: I would like to make a few large cash gifts to my children and grandchildren. This way I can watch them enjoy it while I am alive, rather than by inheritance. I believe a certain amount can be given away each year. How much can I give away tax free?
Answer: Tis the season of giving. The tax implications of a cash gift are often misunderstood. While the federal gift tax rate is near 45%, many exemptions are available.
Myth #1: you can only give away $12,000 to someone each year, without paying a gift tax.
Truth: you can give away a total of $1,000,000 during your lifetime, gift tax free. The $12,000 annual standard represents merely a reporting requirement – because the IRS wants to know when you reach your one million lifetime exemption. Annual gifts under this amount do not require filing of a gift tax return.
Billerica C.P.A., Brian Goguen recommends “fly below the radar by trying to keep the gift amount under the annual exclusion of $12,000”. IRS rules allow for gift-splitting among spouses. For instance, if you are married, both you and your spouse can give $12,000 each to the same person. To take it one step further, if you and your spouse are giving to a couple, you can effectively quadruple the annual gift to $48,000. Remember, tax free gifts to spouses are unlimited.
In the end, if your gifts rise to the level of requiring tax reporting, any amounts given will be deducted from your estate tax exemption. If this is a concern for you, an estate plan should be created to minimize estate tax effects.
Myth#2: the person receiving the gift must report the funds as income.
Truth: gifts are not reportable as income, and thus the recipient is not affected negatively.
Myth #3: only parents can contribute to college 529 plans.
Truth: grandparents can give up to five times the annual exclusion amount of $12,000 to “front-load” a gift per 529 plan. Goguen, advises to “take advantage of this option every five years, when planning your gifts to grandchildren”.