Cash gift tax can sometimes be charged on gifts you give if the gifts exceed a certain value. Before you give any cash gifts or transfer other items of value, it is important to understand the gift tax rules so you can make informed choices.
There are ways to structure gift-giving to avoid tax implications. Parman & Easterday has extensive experience helping clients understand the rules for cash gift tax and will make sure you can be strategic about your gift giving. If you want to reduce or avoid gift taxes, give us a call today.
What is Cash Gift Tax?
Gift tax refers to taxes assessed on the gifts you make. Gift taxes apply not only to cash gifts, but to any assets of any type, including real property, given by one person to another. The Internal Revenue Service defines a gift to include: “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”
This definition means that something can be a gift and trigger the cash gift tax even if money is exchanged. If you have a valuable asset and give it to someone for far less than it is worth, this can trigger a cash gift tax. For example, a parent who gives a child a $200,000 house in exchange for a $5,000 payment has made a gift to the child.
Who Pays Cash Gift Tax?
The cash gift tax is generally paid by the donor who gives the gift. Special arrangements may sometimes be made for the recipient to pay the gift tax, but the IRS rules make it complicated for the recipient of a gift to pay the taxes on it. As a result, the IRS advises you to “please visit with your tax professional if you are considering this type of arrangement.”
How Can Cash Gift Tax be Avoided?
There are a number of different ways in which cash gift tax can be avoided. One is to make certain the total gifts do not exceed the annual exclusion amount for the calendar year in which the gift is given.
For 2016, the annual exclusion for gifts is $14,000. This exclusion applies to each recipient and to each giver. For example, if a father wants to give gifts to his three children, he can give each child $14,000, each gift will fall within the exclusion and no taxes will be assessed. The mother can also give each child $14,000 per year and the gifts will fall within the exclusion.
Because of how these rules work, breaking up gifts over time is often effective. Instead of a parent giving a child a one-time gift of $100,000, the two parents together could give the child up to $28,000 each year ($14,000 from each parent) over the course of four years. By making the gifts in this way instead of giving the gift all at once, substantial tax savings can be achieved.
You can also structure gifts in other ways which make them excludable from estate tax. You can pay tuition or medical expenses for someone as neither of these count as gifts. A parent can pay his child’s entire college tuition and as long as the tuition money is paid directly to the school and did not go to the child first, cash gift tax will not be assessed.
Spouses are always allowed to give gifts to each other, no matter how large, without gift taxes being assessed.
Getting Help from an Estate Planning Lawyer
Parman & Easterday understands the gift tax rules. We can provide you with comprehensive advice on taxable gifts and on your options for avoiding or reducing gift tax. We know you don’t want your generosity to trigger a large bill to the IRS and we will do everything we can to prevent that from happening.
To learn more, give us a call at (405) 703-9987 or (913) 385-9400 or contact us online . You can also join us for a free seminar to find out about gift taxes, estate taxes, and other tax rules you should know when making gifts during your lifetime or after death.
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