Estate Tax Secrets: The Gift Tax Exclusion

Think Estate Tax Planning Doesn’t Apply to You?

You could be right. Especially if you’re one of the 99.85 percent of people whose estates are worth less than $5.43 million ($5.34 million in 2014), according to the Urban-Brookings Tax Policy Center.

But here’s a secret.

Estate planning isn’t just for the ultra-wealthy.

While you might not have an estate worth $5.43 million to leave your children, you might be financially comfortable enough to distribute some of that wealth to your children or favorite charity right now…But maybe you’re not sure how.

Or perhaps you own a small manufacturing business in the Sacramento Valley, a family vineyard in Placer County, or a thriving brewery business in Roseville that is doing so well that you’re worried you might meet that $5.43 million threshold in the future. Are you wondering what you can do right now to avoid the possibility of leaving your family a large tax bill when you die?

As a taxpayer, you already know that the IRS has special rules taxpayers must follow, but like most of us, you probably don’t pay close attention.

At Cook CPA Group in Roseville, it’s our job to know what these rules are and how they affect your tax situation and because educating our clients is part of our job, we’d like to share what we know with you. With that in mind, let’s take a closer look at how taxpayers like you can use the gift tax exclusion to your advantage.

What is the Gift Tax?

The gift tax is a tax on the transfer of property from one individual to another while receiving nothing or less than full value, in return. It only applies to amounts more than the annual exclusion. In 2015 (as in 2014) this amount is $14,000 per calendar year.

What Gifts are Not Taxable?

The general rule is that any gift (over the annual exclusion limit) is a taxable gift; however, there are exceptions. Generally though, the following six types of gifts are not considered taxable gifts:

1. Gifts that are not more than the annual exclusion for the calendar year.

You can make as many annual gifts as you’d like up to the $14,000 limit in 2015 without incurring the gift tax.

2. Tuition you pay for someone.

You can you use the gift tax exclusion to pay for your child’s or grandchild’s tuition at college—as long as it is paid directly to the college and is for tuition only. Supplies, books, dormitory fees, and board do not qualify for the exclusion.
Bonus: Since gifts of tuition paid directly to the college are not considered gifts for gift tax purposes, you can still give your grandchild up to $14,000 under the annual gift tax exclusion rules.

3. Medical expenses you pay for someone.

If you paid an individual to a person or institution that provided medical care for someone. Medical care includes diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, or for transportation primarily for and essential to medical care. Medical care also includes amounts paid for medical insurance on behalf of any individual.
The payment must be to the care provider, and the exclusion doesn’t apply to amounts paid for medical care that are reimbursed by the donee’s insurance.

4. Gifts to your spouse.

You can give gifts up to the annual exclusion limit to your spouse during any calendar year. In addition, spouses that own property together can donate $28,000 annually in 2015 without paying the gift tax.

5. Gifts to a political organization for its use.

The gift tax does not apply to a transfer to a political organization (as defined by the IRS) for the use of the organization.

6. Gifts to charities.

If the only gifts you made during the year are deductible as gifts to charities, you do not need to file a gift tax return as long as you transferred your entire interest in the property to qualifying charities.

Does Making a Gift Affect My Taxes?

Most people don’t need to worry about paying the gift tax because the amount they give is not substantial enough to be taxed (i.e. more than $14,000 per donee in 2015). However, for amounts exceeding the annual exclusion limit, the person giving the gift is generally responsible for paying the gift tax.

Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax; however, you cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).

At Cook CPA Group, we have answers to all of your estate planning and gift tax questions.

Wondering if you can take advantage of tax laws that lower your present or future tax bill while allowing you to generously donate assets to someone who needs them now?

Call Evelyn Cook, CPA today at 916-432-2218 to learn how you can use the gift tax exclusion to improve your tax situation.