5 Ways to Give a Tax-Free Gift in 2018 (and Beyond)
As 2017 winds to a close, Congress is on the verge of passing the most significant overhaul to the Internal Revenue Code in a generation. While this may be the season for giving, one thing is for certain: no one wants to give to the IRS. Federal tax law provides taxpayers many opportunities to give family, friends, and charities a tax-free gift. Some are straightforward, while others may require the help of a professional. Let’s have a look at some of the best ways to take advantage of the tax-free gift giving provision of the Internal Revenue Code.
Your “Yearly Coupons” for Tax-Free Gift Giving
Each year on January 1st, everyone receives what can be thought of as “yearly coupons” for tax-free gift giving. There are several different ways that you can redeem those coupons:
- Annual gift tax exclusion. These gifts are transfers of money or property that can be given all at once, or throughout the year, as long at the cumulative total does not exceed the annual gift tax exclusion. In 2017, you can give up to $14,000 ($28,000 for married couples) per recipient without having to pay any gift tax or file a gift tax return. These gifts can be cash or property, but they must be of a “present” interest. Gifts using trusts or certain types of property (like closely held businesses) can be tricky because the “present” interest requirement can be missing. If you plan on using a trust or an LLC to make your gift, it’s best to work with a professional.
- Pay medical bills. The IRS also allows you to pay an unlimited amount of someone’s medical bills, without worrying about the gift tax. However, the payment must be made directly to the doctor, hospital, or other medical provider in order to qualify.
- Pay tuition. Additionally, you are able to pay an unlimited amount of tuition bills for the benefit of someone else, as long as the tuition is paid directly to a qualified educational institution. One big issue here is that the gift must be only for tuition; books, fees, living expenses, travel, and other costs of education do not qualify.
- Give to charity. For those of you who are philanthropically minded, you can give as much money or property to a qualified charity as you want without worrying about the gift tax. As an added benefit, unlike the gifts above, you may also be entitled to an income tax deduction for the charitable gift.
The Unified Credit: Your “Once-in-a-Lifetime Coupon”
In addition to our annual coupons, we all have a once-in-a-lifetime coupon for taxable gifts, those that exceed or do not qualify for the annual exclusion, called the unified credit. It’s called a unified credit because it unifies the gift tax with the estate tax into a coordinated tax system. Unlike the annual coupons you read about above, once you spend the value of the unified credit coupon for a taxable gift, it’s gone.
Many people assume that because it says taxable gifts, they’ll have to pay the gift tax. Luckily, because of the unified credit coupon, most people will never have to actually pay any gift tax. You only have to pay gift tax if your lifetime gifts exceed the unified credit coupon. Under current law, the amount of the unified credit increases each year, but it never resets (unlike the yearly coupons you read about earlier). Under the Tax Cut and Jobs Act before Congress, the estate tax exemption will double and may be repealed in the out years. In 2017, the unified credit amount is $5.49 million and is scheduled to increase to $5.6 million in 2018. However, if you make a taxable gift, you are required to file a gift tax return with your income taxes. Although the unified credit is currently applicable for gift and estate tax, it is worth noting that the gift tax continues on in the tax proposals being considered by Congress, even as estate tax repeal is on the agenda.
When should I talk to an estate planner?
If you plan on making a gift in excess of $14,000 in 2017 ($15,000 in 2018), then you should talk with us first. Sometimes, the best way of making a gift is to just write a check, but other times giving in a trust, through an LLC, or with an undivided interest in property can make more sense and offer your recipient greater benefits (like privacy or asset protection).
While we don’t suggest you give away anything that you might need, if you do have some surplus, gifting programs are a fun way to see your loved ones enjoy your generosity. Call Andre O. McDonald, a knowledgeable Howard County estate planning attorney at McDonald Law Firm, today at (443) 741-1088 so we can help make sure that your gifting does not draw the attention of the IRS.
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL OR TAX ADVICE.