For the most part, gifts are tax-free. You can give to your children, friends, and others without having to worry about monetary obligations to the government, all while minimizing the tax exposure of your estate after you pass on. There are certain rules that come into play when it comes to annual exclusion gifts, however. For those who transfer large amounts of wealth to others, there may be some tax implications.
Why Give Annual Exclusion Gifts?
First off, let’s look at why people give annual exclusion gifts. Aside from the desire to be generous to others, there are some financial benefits of doing so. It all comes down to estate taxes.
When you pass on, your estate (i.e. all of your wealth and assets) will be passed on to your beneficiaries (usually your spouse, children, grandchildren, etc.). Both the state of Illinois and the federal government set limits on how much of your estate can be transferred without being taxed. Currently, that amount is $11,180,000 for individuals and $22,360,000 for married couples (the amounts were recently doubled, and will continue at this level until 2026).
Some families have large amounts of wealth, and any amount they distribute to inheritors beyond the abovementioned limits will be taxed heavily. As such, they should do everything they can to reduce the amount that they pass on in the end. Annual exclusion gifts are one way of doing that.
Limits of Untaxable Gifts
Every year, everyone a gift exclusion amount that they can give per recipient without any tax implications. As of 2018, the limit is $15,000 per person per year. This doubles for married couples using a joint account, allowing for up to $30,000 in gifts per person per year without gift taxes.
This means a married couple can give each of their children $30,000 each year without it counting against their lifetime limit of $22,360,000 and without incurring any gift tax obligations. Beyond that amount, taxes will likely apply.
For a family with a large amount of wealth, this can be a valuable way to reduce their estate over time in order to avoid estate taxes.
In addition, married persons have unlimited exclusion limits on gifts made to their spouses.
Of course, there are scenarios in which annual exclusion gifts can get more complicated. For instance, married couples who don’t share joint accounts may have to fill out extra paperwork in order to qualify for tax exemptions when giving gifts. One spouse may give a gift worth $17,000 to one of their children, putting it over the individual limit, so in order for it to be covered by their spouse’s exemption, they’d need to fill out a Form 709.
Other complications may arise when a recipient is not a U.S. citizen (different limits may apply) or when gifts are given in forms where the recipient isn’t able to immediately benefit from them.
When dealing with these complex cases, it’s best to consult with an estate planning attorney. Hart David Carson LLP provides estate and tax planning services to Illinois residents, so contact us today with any questions you may have regarding annual exclusion gifts.