Many times we are asked about gifting money to our kids. Always, the first exercise is making sure you don't need it now, or will not need it in the future for your own necessities like healthcare, shelter, food and other usual expenses. Once it is determined that you can afford to begin a gifting schedule, there are some rules that apply. The annual gift tax exclusion this year, 2013, is $14,000. The annual gift tax exclusion is the amount of money a person may give away in a single year to an unlimited number of individuals without having to file a gift tax return. Each may receive $14,000 with no limit on how many people you choose to gift to. The definition of a gift is broad and far reaching when we are discussing the gift tax, but for the most part it’s defined as any transfer where fair market value is below the $14,000 amount so as not to trigger any taxable event. When a taxable gift is given the only obligation of the recipient is to say thank you to the donor: the tax burden (if applicable) lies with the person who gave the gift based on the fair market value on the date it was given.
The intention of the gift tax is to dissuade people from reducing the amount of their taxable estate when they die to lower the amount of estate tax that the heirs will be required to pay. However, there are some gifts that are exempt from the filing requirements for the gift tax and can be of enormous benefit if used correctly. They are payments that qualify for the educational or medical exclusion and gifts to certain political organizations. For the individual these exclusions position a potential donor with the capability to greatly exceed the annual exclusion to cover medical and educational expenses for anyone, not just a relative. The caveat being the gift must be given directly to the medical or educational institution rather than to the recipient to pay the bill, the ultimate beneficiary of the gift can never control the money to qualify. The educational exclusion is restricted to the payment of tuition only: no other educational expenses are included and may be taxable. However the medical exclusion is much more lenient including many medical expenses for procedures, devices, amounts paid for medical insurance on behalf of the recipient, and certain over the counter items. These exclusions give a person the capability to provide a lifetime gift to loved one or friend without reducing the ability to pass other assets tax free at death. Always consult with your Chestnut planner to make sure giving a gift won’t harm you financially in the future... we love our kids, but we also have to eat!