Gift Taxes Q&A

The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not. The gift tax applies to the transfer by gift of any property. Do you have questions about gift taxes and gift tax exclusions? Gift taxes and IRS requirements can be complex. American Bank & Trust helps you navigate gift taxes and annual exclusions.

Q. With the federal estate tax exemption over $10 million per person (over $20 million for married couples), I no longer am concerned about that tax. Do I still need to worry about the gift tax?
A. Yes, you do. You are not likely to ever owe federal gift tax, but you are required to file a gift tax return for any year in which you give someone more than $15,000. That’s the “annual gift tax exclusion,” and it is available each year. If you gave your child $10,000 per year for ten years, no gift tax return would be needed. But if you gave $20,000 in a single year, then a gift tax return would be required.

Q. How much gift tax would I owe on that $20,000 gift?
A. None, most likely. The excess amount, $5,000, would reduce the amount of your eventual federal estate tax exemption. Nevertheless, the gift tax return must be filed.

Q. I have three children, so am I limited to $5,000 for each of them?
A. No, the $15,000 is per person. Say an individual has three children, four grandchildren, and three great-grandchildren. Gifts of $15,000 per year may be given to all ten descendants, removing $150,000 from the taxable estate.

Q. I paid my child’s college tuition this year, over $30,000. So do I have to file a gift tax return on that?
A. No, you don’t. Paying someone’s tuition directly does not count as a taxable gift, no matter the amount of the payment. However, giving the child the cash to make the tuition payment would be a taxable gift.

Q. Any other exceptions like that?
A. Direct payment of medical expenses is also not a taxable gift. Imagine that Mary paid $10,000 directly to health care providers on behalf of her son John this year. She also gave him $12,000 in cash to help him with his household expense. Mary made direct tuition payments for each of her three grandchildren, totaling $90,000. Finally, she gave each grandchild $10,000 cash for “spending money.” Mary has given away $142,000 worth of her wealth to family members, but with this combination of exceptions, she won’t have to file a gift tax return.

Q. What about state gift taxes?
A. Unless you live in Connecticut, you no longer have to worry about gift taxes—all the other states have repealed their gift taxes.

Q. I’m married. I want to give my son $25,000. Should I just give him $15,000, and have my husband write a check for the other $10,000?
A. That would be the simplest when the gift is of cash. But what if the gift is a block of stock worth $25,000? In that case, you and your husband may “split” the gift to apply both of your annual exclusions to the transfer. You have to file a gift tax return reporting the transfer to obtain split gift treatment, but it won’t affect your eventual federal estate tax exemption.

Q. I have some stocks that I bought for $5,000 years ago. I can make a gift of that without filing a gift tax return, right?
A. No, your tax basis does not come into play on this question. What matters is the fair market value of the shares today. Are they worth less than $15,000? Then no tax return is needed. But if the market price is $15,001 or more, a gift tax return will be required.

Q. Why do all this paperwork when I am almost certainly never going to have to pay a gift tax?
A. You’d have to ask your Congressman about that. That phrase “almost certainly” holds the key to answering your question. What happens if you win the PowerBall, and are suddenly worth $100 million? Then you almost certainly will be paying estate and gift taxes, and the prior gift tax filings will come into play. There is another possibility. The current large estate tax exemption is set to expire after 2025. That would bring the exemption down to $5 million (plus inflation adjustments). There has long been support in the Democratic party for reducing that exemption to $3.5 million, and perhaps dropping the inflation adjustments, which are a fairly new phenomenon. Keep in mind also that just 15 years ago, the federal estate and gift tax exemption was only $1 million. You might not be off the hook, after all.