The holidays and year-end festivities present that special time to consider generous money gifts for friends, family and those in need; what we don’t often factor in are the tax consequences associated with those gifts.
During my recent appearance on the “Pete the Planner Radio Show” on WIBC, host Peter Dunn and I discussed the legal ramifications of making gifts before 2014 draws to a close. Below are a few gift tax exclusions to consider taking advantage of this holiday season.
What tax exclusions are available for giving large money gifts?
Any time someone provides a benefit to another person (e.g. cash, paying the person’s expenses) it is a “gift” under our federal tax laws and taxed at the rate of 40 percent of the value of the gift. Gifts will trigger gift taxes unless there is an exclusion or the individual making the gift uses part of her “unified gift and estate tax credit.”
Each person has a lifetime “unified tax credit,” the amount of which changes through legislation. If you want to make gifts to others, and avoid gift taxes or the use of your unified tax credit, you will need to come within an exclusion.
The most common exclusion is what is known as the “annual exclusion.” The annual exclusion is $14,000 per donee (recipient of the gift) per donor (the gift-giver) per year. There is no limitation on number of individuals who receive the gift. As a married couple, you and your spouse can give $28,000 per donee.
Another exclusion available is for the payment of the donee’s educational tuition. To qualify for this exclusion, the donor must pay tuition expenses on behalf of the donee directly to the educational institution. There is no limit to the amount of the gift.
There is also a gift tax exclusion for medical expenses. Similar to the educational tuition exclusion, the payment for the medical expenses must be made directly to the medical provider. Keep in mind that to be eligible for the exclusion, the medical expenses must be “qualified,” which generally includes health insurance premiums, expenses for doctors, dentists, psychologists, hospitals, inpatient alcohol/drug treatment, prescription medications, prescription contact lenses and glasses, and the like. At this time, cosmetic surgery and over-the-counter medicines do not qualify.
With the gift tax exclusions, there are a number of ways you can provide significant and meaningful gifts to others and avoid paying gift taxes.