Planning – Annual Gift Limits

Do you have a family member that is impossible to shop for?

If so, you are not alone. I happen to be that person in my family, and I am confident that every family has one. But I’ll let you in on a little secret. There’s one gift that pleases everyone, and it can make you the hero of the holidays. It’s cold hard cash. And best of all, it can be tax free!

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I’m sure many of you have heard of the estate tax (more commonly referred to as the “death tax”) that’s charged to people after they die. It’s complicated, but generally speaking, if the value of your estate will be less than $5.5 million when you die, you don’t need to worry about it since you’re not likely to have to pay any estate taxes (keep in mind that this $5.5 million figure is tied to inflation and increases slightly every few years). If, however, you expect your estate to be worth more than this when you die, you’ll want to consider taking advantage of the Annual Gift Tax Exclusion to pass on as much to your heirs tax free as possible.

So What is the Annual Gift Tax Exclusion?

The IRS has determined that you can give a certain amount of money to anyone that you want each year, and no one has to pay any taxes on it. The current amount is $14,000 per person, or if you and your spouse are gifting together it increases to $28,000. You and your spouse could give $28,000 to your son, $28,000 to your daughter, $28,000 to your neighbor, etc. There’s no limit to how many people you give a gift to, as long as it doesn’t exceed the annual limit per person. Additionally, you can make unlimited payments to cover education or medical expenses for someone else, as long as the payments go directly from you to the institution.

There are many ways families can take advantage of the gift tax exclusion, but here’s an example of how one family could choose to pass on money to their kids tax-free.

Mr. and Mrs. Jones are looking at retirement and decide to sell their 5 bedroom mansion. It’s become too big for them, so they want to downsize to a 2 bedroom condo. Since they are already financially secure and expect their estate to be more than the exemption when they die, they decide to gift their son $28,000 from the sale of the family house (pretty nice, huh?). Since their son and his new wife are looking to buy their first home, they also gift her $28,000. That’s a $56,000 gift that can be accepted and used for the down payment on a new house with no tax consequences. I told you that you could be the hero of the holidays!

One caveat to consider prior to implementing any gifting strategy, however, is the current tax climate. While there is currently an estate tax in place, President-Elect Trump has been vocal about wanting to do away with it. The details are fuzzy, and likelihood of it happening are unknown, but it is something to consider.

Matthew Vitlin is a Fee-Only financial advisor with Reliant Wealth Management. He helps individuals and families from all walks of life start, grow and manage long-term investment portfolios. As Vice President of Finance for Nevsky Prospekt, LLC, (a family-operated real estate investment portfolio), Matthew is highly skilled at looking beyond traditional stock market investments for his clients.


About the Author:

Tim Plachta, CFP® owns and operates Reliant Wealth Management and Reliant Consulting Partners.  He works primarily with small business owners to help them increase profit, reduce their workload (so they can relax more), and invest enough of their earnings to achieve financial independence.