Tis the Season of Giving

When my kids were little, their letters to Santa took longer to read than ‘War and Peace.’ They wanted all different types of toys and games. One year, they even asked for flying backpacks. This year, however, they’d be thrilled with cash. And my kids are not alone. A lot of the parents I talk to say the same thing about their kids.

Some grandparents even prefer giving cash because then they don’t have to shop. This leads to a ton of my clients asking me, “How much can I give to my kids?” The rules around gifting are confusing, but hopefully I can shed some light on things. After all, when it comes to talking about gifts, there’s no time like the present.

Lots of my clients say, “I can give each of my kids $10,000 a year, right?” Ten thousand dollars was the longtime gift amount known as the annual gift tax exclusion. Today (and in 2020), that number is $15,000. This is the amount of money (or the value of other property, such as stocks, vehicles, real estate, etc.) a person can give away each year without having to report it to the IRS. Only the gift giver has the obligation to report gifts – the gift recipient never has a tax consequence, regardless of the size of the gift.

Many people believe gifts can only be to family members, but gifts can actually be given to anyone – kids, grandkids, in-laws, friends, neighbors, or even your favorite attorney. For couples, each spouse can make gifts. For example, I could give $15,000 to one person and my wife could also give $15,000 to that same person, all without any tax reporting.

If I give more than $15,000 to one person, I don’t necessarily owe any tax either. That’s because each of us also has a lifetime gift tax exclusion. This year that number is $11.4 million, and it increases to $11.58M in 2020. So the amount of any gift to one person in excess of $15,000 in any given year is deducted from our lifetime exclusion.

For example, if I gave my dad $16,000 for Christmas (sorry Dad – please don’t hold your breath!), I would have to fill out a gift tax return, which is Form 709, and file it with my 1040 by April 15. This return would inform the IRS I made a taxable gift of $1,000 in 2019 (again, I get a free pass on the first $15,000). I don’t owe any taxes, however, because the IRS simply deducts this gift from my lifetime total of $11.4 million. So now over the course of the rest of my lifetime and when I die, I can only give away $11,399,000 tax-free.

Even though the gift and estate tax exemption has been over $11 million since 2017, I’m still having a hard time wrapping my mind around these numbers. When I first started practicing, the limit was only $600,000. So I’ve gone from having to do extensive planning for a gaggle of clients to avoid these hefty taxes to now having to plan for only a handful.

HOWEVER, Medicaid, the government program designed to help pay for nursing home stays for people who can’t afford it, has stricter rules for gifting. Medicaid can refuse to pay for someone’s care if they made any gifts within the 5-year window before applying for benefits, even to a charity.

When I asked my wife what gift she wanted for Christmas, she said, “Anything with diamonds.” So I got her a deck of cards.

I hope you and your families have a blessed Christmas!