Two Roadblocks to Gifting After You Retire

There are two roadblocks I’ve seen some Relaxing Retirement members confront before they became comfortable and confident providing financial assistance to their grown children and grandchildren.

The first roadblock is developing the unflappable confidence that you have enough built up in your Retirement Bucket™ of investments to make gifts to your children and grandchildren without jeopardizing your long-term financial security. 

Your custom designed Retirement Blueprint™ answers that question for you by spelling out precisely how dependent you are on your Retirement Bucket™, and how much more you can afford to spend (or give) and still maintain your desired lifestyle for the rest of your life. 

Once you become comfortable with your Retirement Resource Forecasters™, the next roadblock I see and hear a lot is the haziness surrounding gift tax laws. 

A lot of this has changed in the last few years in this area, and I continue to receive a lot of questions, so I thought I’d take the opportunity to clarify some of the questions I’ve received surrounding the issue of “gifting”.

What is considered a “gift?”

This may sound like a ridiculously simplistic question, but from a federal estate and gift tax perspective, the definition is very clear.

A gift occurs when you’ve given something of value to another person or entity with no retention of ownership rights to the gifted item itself.

In other words, a gift is only considered a gift when you no longer have any ownership rights after the gift is given. 

You may receive benefits from it during your lifetime, such as income, but you no longer own or have any control over the asset itself.

How are gifts taxed?

Just as the federal government has instituted an estate (death) tax on your ability to pass on all of your accumulated assets at your death, they have also imposed a tax on your ability to give it away during your lifetime so that you don’t give it all away right before you pass.

And, this tax rate mirrors the estate tax rate, i.e. as high as 40%!

There is a large “but,” however.

Are all gifts taxed?

During your lifetime, you may now give away $11.7 million ($23.4 million per couple) without being subject to gift taxes.  This is what is known as your lifetime exclusion.

This, however, eats into your estate tax exemption. If you’ve given away $1 million during your lifetime, for example, that reduces your $11.7 million estate tax exemption at death dollar for dollar, so you could then pass on $10.7 million at your death without estate taxes.

The key distinction is that, in addition to this, you may also give away $15,000 each year to anyone or any entity you wish without being subject to gift taxes.  A couple could give away $30,000 ($15,000 each).

What if I give away more than $15,000 in one year?

If you give away more than $15,000 to any person in any given year, you are not necessarily subject to gift taxes.  The amount over $15,000 simply eats into your lifetime exemption amount of $11.7 million. 

Let’s say, for example, that you give away $100,000 to your son to help him purchase a home.  If you have no spouse, then the first $15,000 passes without any gift tax.  The remaining simply $85,000 eats into your $11.7 million lifetime exemption (and your $11.7 million exclusion at your death). 

In other words, in addition to $15,000 per year, you may now pass on $11,700,000 during your lifetime without gift taxes.

The way the federal government keeps track of this is through your gift tax return which you must file if you provide a gift in excess of $15,000. 

To summarize this point, and clear up any confusion, if you make a gift during any given year of more than $15,000, it’s highly likely that you have no gift tax due.

Your only obligation is to submit a gift tax return with your income tax return which simply notifies the federal government to subtract that excess amount from your lifetime exclusion amount (currently $11.7 million.)

What is the tax rate?

Federal gift tax rates mirror estate tax rates and reach 40% very quickly (at $1 million).

Let me repeat that: 40%

After working and saving your entire life, in addition to paying income, sales, and real estate taxes, you then have to pay gift and/or estate taxes when you pass away.

Do I pay the tax when I make the gift?

Gift taxes are paid by the giver.  So, if you give away money or assets that trigger a gift tax being due, you would have to file a gift tax return that year and pay the tax.

If you are the recipient, you do not pay gift taxes.  And, in most cases, as the recipient, you don’t pay income taxes. 

The exception to this is if you receive an appreciated asset such as a stock.  If the stock was purchased for $10,000, and it is now worth $100,000, upon the sale of the stock, the recipient would be responsible for paying capital gains taxes, but not gift taxes.

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