The days are flying by, and before you know it, the New Year will be here. Plan ahead and fine-tune your gift giving before the holiday chaos ensues. It’s possible to make annual, medical, and educational exclusion gifts that aren’t technically considered as such under federal gift tax law.

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Annual Exclusion Gifts

Annual exclusion gifts are one type that you can give that do not trigger federal gift tax. For the year 2022, the gift tax threshold is $16,000 per person. That is expected to increase to $17,000 in 2023.

With annual exclusion gifts, assets amounting to $16,000 or less that are given to an individual within the calendar year are not considered gifts (for tax purposes at least – the recipients will still be thankful!).

Hypothetically, that means you can gift assets amounting to $16,000 or less to as many individuals you’d like up to December 31st of this year, then follow that gifting criteria again for the same recipients on January 1st, 2023 without having to file them under federal gift tax law.

Some sources may indicate that married couples are able to effectively double the annual exclusion amount ($32,000 per calendar year). Even if a married couple abides by this threshold, in some cases they may still be required to file a gift tax return. We recommend consulting our estate planning services to see if you need to report these “split gifts”, as they’re referred to.

Medical Exclusion Gifts

Qualified medical exclusion payments / gifts are another type of transfer that aren’t considered ‘gifts’ under federal tax law.

To take advantage of medical exclusions, one must make a payment directly to a healthcare institution or medical insurance provider. Generally, this exclusion can be applied to any medical expense qualifying for a deduction under federal income tax guidelines.

For instance, you could have given $20,000 to the hospital that your grandchild was treated in for an emergency procedure earlier in the year, then give the same grandchild up to an additional $16,000 amount before December 31st, 2022. You could even go as far as to gift another $16,000 on January 1st, 2023. Even in this extreme example, these gifts would not trigger the federal gift tax threshold, as long as they are accounted for and transferred with the exclusions in mind.

An important note: the medical exclusion gift / payment must be made directly to the medical institution or medical insurance provider, not the individual receiving the medical care or insurance money. Even if the payment is “earmarked”, the patient cannot touch it, or the federal tax law will kick in and consider it a gift.

Educational Exclusion Gifts

Gifted assets that meet the criteria of educational exclusions are another type of transfer that aren’t considered ‘gifts’ under federal tax law. This includes qualifying payments made directly to both domestic and foreign institutions.

So hypothetically, you could pay for your grandchild’s emergency procedure (referenced above), pay for their educational tuition amounting to $25,000, give them an additional $16,000 by December 31st, then give them $16,000 on January 1st, 2023. That’d be one thankful grandchild, and you likely wouldn’t trigger any federal gift tax returns.

Remember two things before initiating an educational exclusion gift: First, the payment must be made directly to the educational institution, not to the individual enrolled. Next, the payment can only be put towards tuition. Not supplies, books, dorm payments, or other related educational expenses.

Anderson, Dorn & Rader Can Help You Navigate Gift Giving

It can be exciting to gift money and property to loved ones. After all, they will carry on your legacy in the future. While it’s tempting to simply transfer it to the recipient’s bank account, consider the guidelines surrounding annual, medical, and educational exclusion gifts to avoid the burden of taxes and maximize your financial picture. For assistance in doing so, contact the experienced Reno estate planning attorneys at Anderson, Dorn & Rader. We are happy to walk you through the process to make it enjoyable for all parties involved.

annual gift tax exclusion in renoDuring this Holiday season, the majority of us get wrapped up (pun intended) in giving.  'Tis the season, right?  But did you know that certain gifts may be subject to a transfer tax?
Whenever ownership of property is transferred, the IRS imposes a “gift tax.”  What is considered a gift?  According to the government, a gift is “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.”  Despite the general rule that all gifts are taxable, there are some exceptions.  For example, tuition or medical expenses you pay for someone else are not taxable.  Also, gifts to a spouse, certain political organization or qualified charities are deductible from your taxes.
The most important exception is the Annual Gift Tax Exclusion, which provides that gifts not exceeding the annual exclusion amount for that calendar year are not taxable.  The Annual Gift Tax Exclusion for 2015 is $14,000 per recipient.  In plain language, this means that you can give away as much as $14,000 per recipient during the year to anyone you choose without any tax consequences.  These gifts can be to anyone, including family, friends or strangers.  You and your spouse can also combine your gift tax exclusions, meaning the gift can be for as much as $28,000 for each recipient, if it is given as a joint gift.
This is not to imply that you cannot make a gift larger than $14,000 per recipient per year.  If you make a gift that exceeds the annual exclusion amount, the gift must be reported to the Internal Revenue Service any applied against your unified credit (discussed below).

Not all gifts fall under the annual gift tax exclusion.

The annual gift exclusion only applies to gifts of “present interest.”  This means that the person must receive an unrestricted right to immediate possession, use and enjoyment of that particular gift.  For example, cash left in an envelope hanging on the Christmas tree is a gift that conveys a present interest.  On the other hand, an irrevocable trust that does not allow the beneficiary to have access to the money until they reach a certain age is an example of a gift of a future interest.

What is the unified credit?

The gift tax and estate tax exclusions are often referred to as the unified credit.  Together they entitle you to a lifetime exclusion of $5.43 million (in 2015), meaning that $5.43 million of your estate will be exempt from inheritance or gift taxes.  To the extent a gift made during a year exceeds the Annual Gift Tax Exclusion, then your unified credit is reduced by that amount.  In other words, if you make a gift to an individual in the amount of $1,014,000, the gift will not be taxable but will reduce your estate tax exemption to $4.43 million upon your death (the $5.43 million unified credit, less the $1 million gift that exceeds the Annual Exclusion Amount).  The unified credit is also “portable,” meaning that if you do not use the full amount of your tax credit the remainder may pass to your spouse when you die.

What happens if I exceed the lifetime exclusion amount?

If you exceed the $5.34 million lifetime exclusion amount, you will be required to pay as much as 40% tax on any transfers made either during your life (as gifts) or upon your death (passed on as an inheritance).  One exception is a gift made to your spouse, as long as he or she is a U.S. citizen.  Those gifts are considered tax-free under the unlimited marital deduction.

How to make the most of your Annual Gift Tax Exclusion

In order to make the most of your annual gift tax exclusion, remember that the exclusion is based on a calendar year.  You cannot go back and claim a year you may have missed.  However, you can spread a large gift over two or more years and still avoid gift tax complications.  If you have a goal of gifting as much as possible without tax, you may write a check to to your beneficiary for $14,000 before December 31, 2015 (or $28,000 if you are married and splitting gifts with your spouse), and write a second check to the same beneficiary for $14,000 on January 1, 2016 (or $28,000 if you are married and splitting gifts with your spouse).  That way, both gifts will be tax free and will not reduce your lifetime exclusion.
If you have any questions about gift taxes, estate taxes, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.

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