Tax law can get pretty complicated. But for most situations, it’s not quite as complicated as it may seem.
Take the Gift Tax, for example.
The Gift Tax is assessed on taxable gifts. What is a taxable gift? Well it’s easier to say what a taxable gift is not:
Gifts that are not more than the annual exclusion for the calendar year (14,000 for 2016).
Tuition or medical expenses you pay for someone (the educational and medical exclusions).
Gifts to your spouse.
Gifts to a political organization for its use.
So if mom wants to give junior twenty thou in cold hard cash this year, then only $6,000 ($20,000 minus $14,000 exclusion) will be a taxable gift.
The good thing about the annual exclusion of $14,000 is that it applies on a per person basis. So pops could give junior another $14,000 without giving him a taxable gift.
So what happens if you have a taxable gift?
In the example above, because mom gave a taxable gift to junior, mom and pops would have to file Form 709, United States Gift (and Generation -Skipping Transfer) Tax Return.
The return is due no earlier than January 1 and no later than April 15 following the year of the taxable gift.
So mom and pops will owe gift tax?!?!?
No, and here is why. Over the course of your life, you’re granted an exemption from the gift and estate tax. This exemption, also known as the Estate Tax Planning Professional Career Killer, is $5,450,000 for 2016. So, before you’re assessed any gift or estate tax, you have to give away or pass on at death $5,450,000 in cash or other property. And this is on a per person basis. So together, mom and pops can give away or pass on at death $10,900,000 in cash or other property before paying any gift or estate tax.
Mom and Pops will file the gift tax return, the exclusion will reduce the amount of tax they owe to $0, and when mom and pops pass on, they’ll now be able to give $10,894,000 (10,900,000 minus $6000 taxable gift) to Junior before paying any gift/estate tax!!!
You’re right. This isn’t complicated.
It’s not, but sometimes CPAs or attorneys may make it seem complicated.
Most of us won’t end up with Donald Trump or Hillary Clinton money. Even the most successful among us usually pass on some real estate, retirement funds, CDs, furniture, and Bob Dylan records to our loved ones. The value of this property rarely exceeds the $5,450,000 exclusion amount. ($10,900,000 for married couples).
We don’t need to engage in complex transactions solely to avoid having to file a gift tax return to report $0 tax owed at the end of the year. We don’t need to partially gift real estate to our children over several years.
Your concern better lies with deciding who you want to give your property to, how much you want to give them, and when you want them to receive it.