By Laura Saunders
In the most recent Tax Report column on the new $5 million gift-tax exemption, there wasn’t space to discuss a different, but related break that’s among the most useful in entire U.S. tax code: the annual $13,000 gift exclusion.
Here’s how it works:
Unlike the $5 million exemption, which applies to total gifts made during a person’s life, every taxpayer can take advantage of the $13,000 exclusion, every year. A taxpayer may make as many gifts as he or she desires as long as no one person gets more than $13,000 of value in any one year.
Married couples may therefore give $26,000 to each recipient; if they make a special election, the entire $26,000 can come from one partner’s property. The annual exclusion doesn’t count against the $5 million lifetime exemption, and there is no deduction for a gift. Although many states have estate or inheritance taxes, only two have gift taxes: Connecticut and Tennessee.
The recipient may be anyone—not just a relative—and the gift may be either cash or a non-cash item such stock or other property. It may even be possible to give a $13,000 “interest” in a piece of real estate or an item that can’t be divided, such as a painting. Such moves are complex and require expert help, however, says estate attorney Ronald Aucutt of McGuireWoods. Gifts don’t have to be made outright to a recipient either; they may be made to a trust instead.
Gifts must also be “completed.” If one is, for example, acting as the agent for someone who may be dying in hours or days, it’s best to have $13,000 gifts out of the owner’s account before death –say by using cashier’s checks. If Grandma wants to use her annual exclusion to give a relative an heirloom, the relative should take possession of it, or the IRS could challenge it.
By making gifts over several years and to many people, taxpayers can move substantial assets (and potential appreciation) out of their estates.
Example: Steve and Martha have 3 children and 6 grandchildren. Even if they don’t make gifts to the children’s spouses, over three years they could shift more than $700,000 without touching their $5 million exemptions.
In considering what to give, taxpayers should be aware that the giver’s “cost basis” in the item carries over to the recipient. So if Jane bought XYZ stock for $1,000 many years ago that now is worth $13,000 and gives it to her niece Anne, Anne’s taxable capital gains on a sale will be measured from $1,000, not the value on the date of the gift. By contrast, if Jane dies with the stock in her estate and Anne inherits it, her cost basis jumps to the full market value as of Jane’s death and Anne can skip paying tax on prior appreciation.
A final useful twist in the rules is that givers who want to help with college costs may batch up to five years’ worth of exemptions, or $65,000 per giver, as a contribution to a 529 college savings plan, as did Pres. Obama and his wife Michelle in 2007 for their daughters. No other gifts to the recipient are allowed for the period.
Readers, do you take advantage of the $13,000 per person gift tax exemption?