Tax-Free Gifting This Holiday Season

If clients are making a gift of cash in the amount of $15,000 or less, then all they would need to do is ensure that the gift is made by December 31, 2020, but ideally well before that date, so that the check can be cashed by the recipient. If the gift is not made by 12/31, then it will count as an annual exclusion gift for 2021. One important thing to note is that the annual exclusion clock starts all over again on January 1, 2021. Once the clock restarts, tax-free gifting can begin again.

Can I gift tax-free to a spouse?

Generally, gifts to spouses are exempt from tax and an unlimited amount of gifts can be made between spouses (thank you honey)! But note, if your client’s spouse is a non-US citizen, then you should be aware that the rules are different for them and there will be gifting limits they must follow.

Let’s talk details.

If the value of the gift is easily ascertainable (i.e., cash, publicly-traded shares of stocks, bonds, etc.) then there’s no need to do anything else. In situations where a client wants to gift shares of a private company or other hard to value assets, then it’s best to obtain an appraisal and file a gift tax return with the information to avoid tax audits later, even though the gift is tax-free.

Are there any exceptions?

There are some gifts that remain tax-free even though they exceed the annual exclusion amount. These gifts include the following:

●     A gift to cover someone’s education tuition, if paid directly to the educational institution. Keep in mind this does not cover gifts to cover room and board, books or supplies

●      Gifts to cover someone’s medical expenses, if paid directly to the medical facility

●      A gift to a political organization

The gift tax also doesn’t apply when giving to certain tax-exempt organizations:

●      A 501(c)(4) social welfare organization or civic league

●      A 501(c)(5) labor, agricultural, or horticultural organization

●      A 501(c)(6) business association, such as a chamber of commerce

What happens if a gift is over the limit?

If any gifts to any individual exceed the annual exclusion, the donor will have to file a gift tax return and potentially pay a gift tax on the value of the gifts that exceeds the lifetime gift exemption. To avoid this, keep gift amounts under the maximum of $15,000.

The current lifetime amount that can be gifted tax free (not including annual exclusion gifts) is $11.58M. The gift and estate tax exemption is a combined exclusion of $11.58M so that if you gift up to that amount, you will have no exclusion left for estate tax purposes. Finally, note that the $11.58M exemption is set to sunset in 2025 and may be changed by Congress before then.

Sharing the wealth during the holiday season is admirable, just ensure your clients are following best practice when it comes to tax-free gifts.

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Anna Byrne is the founder of Eckert Byrne LLC and an estate planning attorney with over 25 years of experience creating estate plans that encompass more than just the transfer of tangible assets. A widow herself, Anna authored the recently published book, A Widow’s Guide, to help women who have lost a spouse through their first year. Her life experience as a young widow revealed a need to pass on wisdom and values to help those left behind. Anna can be reached at anna@eckertbyrne.com.