At this time of year, many people think about being generous to family and friends. These altruistic actions are wonderful, but don’t forget that tax law regulates your generosity. These gifts are subject to the same gift tax rules as other lifetime transfers. But there are ways to make these gifts efficiently and without worry.Here are some tried and true strategies for making tax free gifts:
- Write a check for up to $14,000. The easiest way to share generously is by making an annual exclusion gift. Currently the annual exclusion is $14,000; so you can make $14,000 gifts to as many people as you want, without reducing your lifetime exclusion of $5,340,000. If you are married, you and your spouse can combine your annual exclusions to make gifts of $28,000.
- Fund college savings plans. Federal law allows you to contribute the annual exclusion amount to Section 529 college savings plans. Separate accounts may be set up for each person you want to benefit. The money in these accounts grows tax free and can be withdrawn tax free as long as the funds are used to pay for accredited college, graduate school or vocational school expenses. The law also allows a lump-sum deposit of $70,000 (or $140,000 for a married couple) per person at one time. If this option is chosen, a gift tax return needs to be filed electing to treat the gift as if it were spread over five years. During the five year period, no additional annual exclusion gifts can be made to the beneficiary of the account.
- Pay medical, dental and tuition expenses directly. Surprisingly, many people do not realize that they can pay medical, dental or tuition expenses for as many people as they want without using their annual gift exclusion or impacting their lifetime exclusion in any way. The only requirement is that the payments must be made directly to the medical provider or educational institution. The person who is being benefited cannot be reimbursed for the expenses.
With the holiday season in full swing, there are still opportunities to give generously to those you hold dear without incurring unanticipated tax consequences. If you have questions about gifting and taxes, contact your RKL service provider or contact one of our local offices.
Contributed by Karen L. Rohde, CPA, CSEP, a manager in RKL’s Tax Services Group. With more than 20 years experience in public accounting, Karen specializes in individual tax planning and compliance, as well as trust and estate tax compliance and estate planning.