Q. My wife and I are considering making large gifts to our two children and four grandchildren, and we would like to do so in a way that is “tax wise”. Do you have any advice for us?
A. Yes. Many people mistakenly believe that you cannot gift more than $14,000 per year without incurring a gift tax. Not so. In fact an individual can actually gift more than $5 million during lifetime without incurring a gift tax. Here is the way gift taxes work:
1) Annual Exclusion Gifts: No Gift Tax Return Required:
a) $14,000 Per Year: Each of you can gift up to $14,000 per year per recipient without the need to file a Gift Tax Return. Such gifts are called Annual Exclusion Gifts and you can make such gifts to as many persons as you wish each year.
b) “Doubling Up”: If you and your wife are in a position to do so, together you can actually double that amount for each gift recipient. So, together, you could gift a total of $28,000 to each recipient for a total of $168,000 to your loved ones : $14,000 X 2 donors X 6 recipients.
c) Year End Straddle: On or after January 1, 2015, you and your wife could do the same thing once again, as you would then be in a different tax year. So, over the course of a period as short as a calendar week – provided that the week straddles both the last days of this year and the early days of next year — the two of you could gift a total of $336,000 ($168,000 X 2 Tax Years) to your loved ones without the need to file a Gift Tax Return or use any of your lifetime exemptions. I call this strategy the Year-End Gift Straddle.
2) Gifts Above the Annual Exclusion: Gift Tax Return Required
a) Lifetime Exemption: If you choose to make gifts above the Annual Exclusion amount, then you can make them gift tax free by using a portion of your Lifetime Exemption (sometimes called the “Unified Credit” or Lifetime Exclusion). That Lifetime Exemption is currently $5,340,000 per person for U.S. citizens, and increases to $5,430,000 next year. Annual Exclusion Gifts do not count against that exemption; they can be made in addition to Lifetime Exemption gifts. Also, a surviving spouse can, by making a timely election, opt to preserve the deceased spouse’s unused exemption for the survivor’s own use, thereby effectively doubling it. This is called “portability”.
b) Gift Tax Return: To the extent that your gifts exceed the Annual Exclusion amounts, you must file a Gift Tax Return even though no actual gift tax would be due. Reason: the IRS wants to track your use of your lifetime exemption, so that it knows how much you have left to use upon death. Example: if you used $1 million of your lifetime exemption to make excess gifts during life, then your remaining exemption to apply against estate taxes upon death would be $1 million less.
Cautions: Before making large gifts, be sure that you can afford to do so. Lastly, if there is a possibility that either of you may need to apply for a Medi-Cal subsidy for nursing home care in the near future, you should consult a professional with special knowledge about the Medi-Cal program before making those gifts: Gift transfers may adversely affect your ability to qualify for a Medi-Cal subsidy unless those gifts are handled in a very special manner.