Dear Carrie: My mother is feeling especially generous this holiday season, and has mentioned that she intends to give each of her children and grandchildren a significant monetary gift. I’m wondering, though, what that means tax wise for her — and for all of us? — A Reader
Dear Reader: How wonderful for you and your children that your mother is in a position to help you all financially. I’m a big believer in one generation helping the next, and the holidays are an excellent time to share one’s good fortune. I’m also happy that you’re concerned about the tax situation for your mother, as well as yourself. It shows a mutual concern and a sense of financial responsibility. Gifts are great to give, but it’s even more gratifying when the receiver is aware and appreciative.
In this situation, I’m pleased to tell you that chances are there will be no tax liability for either your mother or any of the recipients. That’s because current gift tax laws allow for some pretty hefty exclusions for the giver, and gifts aren’t considered as income to the receiver, regardless of the size.
But, of course, as with anything to do with taxes, there are some very particular dollar figures that you should be aware of. So here are the basics that perhaps you and your mother can review together.
What You Can Give Tax-Free Annually
While technically the IRS considers any gift a taxable gift, currently an individual can gift up to $14,000 a year to anyone — and any number of people — without incurring gift taxes, or even having to report the gift. Married couples splitting gifts can give up to $28,000 a year (splitting gifts requires you to file a gift tax return where you make the election to do so — see below).
This means your mother could give each of her children and grandchildren up to $14,000 during this 2015 holiday season, and not only would she not have to file a gift tax return, none of you would have to pay taxes or even report the gift.
Just for the record, if your mother should choose to make direct payments to providers for tuition or medical expenses for any of you, those payments wouldn’t be considered taxable gifts, and aren’t included in the $14,000 annual limit. By doing that, she could give even more without tax consequences.
How the Lifetime Exclusion Works
If you stay within the $14,000 annual exclusion, giving monetary gifts can be pretty simple. It’s when you give more than $14,000 to any one person during the course of a year that things get a bit more complicated.
You may have heard of the lifetime exclusion. This is the amount you can give above and beyond the $14,000 annual limit during the course of your life without incurring gift taxes. For 2015 that amount is a whopping $5,430,000 and will go up to $5,450,000 in 2016.
With such a high limit, you’d be right to think that most people won’t need to be concerned. But, whether or not you ever reach the limit and have to pay gift taxes, you are required to report any gift that’s more than the $14,000 annual limit. The excess counts toward your lifetime exclusion, and will be used to calculate whether your estate will owe taxes upon your death.
Here’s an example:
Let’s say your mother has two children and four grandchildren. As an individual, she can give each of these six people up to $14,000 this year without having to report the gifts or pay gift taxes.
However, let’s say that she wants to give each family member $25,000 this year. In this case, anything above $14,000 given to any one individual has to be reported, and counts toward the $5,430,000 exclusion. So she’d have to report that extra $11,000 per person and would subtract $66,000 from her lifetime exclusion (the cumulative total is always reported on the most recent gift tax return).
A couple More Important Points:
Another thing anyone contemplating giving large gifts should be aware of is that to qualify for the exclusions — both annual and lifetime — a gift must be a present interest, which means that the recipient has an unrestricted right to the immediate use of the property. A gift of future interest, which is restricted in some way by a future date, doesn’t qualify (there are some exceptions, including custodial accounts and so-called “Crummey trusts”). Gifts of cash and property where title passes immediately are examples of gifts of present interest.
I also want to expand a bit on gift splitting. As I mentioned, a couple can combine their annual limit and give twice as much (currently $28,000) to any number of individuals each year provided both are in agreement. However, if they decide to do this for one gift, they must split all other gifts during that year. And they would also have to file a gift tax return (IRS Form 709).
Making the Most of the Gift
Your mother’s generosity can provide opportunity for all of you on many levels. This would be a perfect time to sit down together as a family and talk about saving, investing and how to make your mother’s gift grow. Even young children can learn about setting goals, budgeting and how to prioritize spending. A custodial account is a great way to teach young people about investing. And discussing these things might give the adults a fresh perspective on their own finances.
To me, while you’re all lucky to receive this holiday windfall, the chance to focus as a family on wise money management could be the greatest gift of all.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president
of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at askcarrie@schwab.com.