Death and Taxes – Find out Whether your Loved Ones Will have to Pay the Tax Man

There is a lot of misunderstanding when it comes to gift taxes.  Over the last few years, the law in New York State has changed significantly.  What follows are questions and answers on some of the most common issues regarding gift taxes.

Are gifts taxable?

There are multiple exceptions that keep gifts from being taxable.  If your gift does not fit under one of the exceptions, then you must file a gift tax return – IRS Form 709 – and potentially pay gift taxes.

What are the exceptions to gift taxes?

Generally, a gift is not taxable if it is: a) made to your spouse, b) below the IRS annual exclusion amount, c) made to a charity, d) made to a political organization for its use, or e) paid directly to a medical or educational institution on someone’s behalf for qualified expenses.

What is the “IRS annual exclusion amount”?

The IRS annual exclusion amount represents a monetary value under which gifts can be made in a calendar year, without any applicable gift taxes.  In 2016, the amount is $14,000.  So in 2016, you can make a gift to someone of up to $14,000 without having to worry about gift taxes.

What if I give over the annual exclusion amount to someone?

If you give an amount over the annual exclusion amount, that excess amount needs to be reported on an IRS Form 709.  A gift tax is calculated on the amount over the annual exclusion, but you won’t have to pay a tax at that time, unless you’ve made taxable gifts over your lifetime in excess of the applicable limits.

Do the recipients of my gifts need to pay tax?

Generally speaking, the recipient of a gift does not have to pay gift tax or income tax because of the gift.  The recipient may have to pay income tax on any income generated by the gifted asset.

What is “gift splitting”?

You can “split” a gift by sharing the gift with your spouse.  For example, if you gift $27,000 to your son in 2016, that amount is over the $14,000 annual exclusion for 2016 and therefore gift taxes would potentially apply.  However, you can join with your spouse and “split” the gift into two gifts of $13,500 each, resulting in two gifts under the $14,000 annual exclusion for 2016.  That “split” means the gift is not taxable, however you do have to file a Form 709.

Navigating the intricacies of the state and federal tax codes can be challenging.  In order to minimize your tax burden and increase what you leave for your loved ones, you can contact the  experienced estate planning attorneys at the O’Connell and Aronowitz office near you.