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Financial Fundamentals of Gifting to Others

Gifting is both a common occurrence and a topic often asked about. Who doesn’t enjoy giving toys to the kids or grandkids on holidays and birthdays? Sometimes we enjoy giving even more than receiving. For those really big gifters, if you gift enough, it becomes a tax consideration.

The two main parties involved in gifting are the donor, or the person giving a gift, and the donee, or recipient of the gift. We should discuss one distinction before moving forward, which is the difference between a present interest gift and a future interest gift. A present interest gift is one where the donee has full access to the gift right away, while a future interest gift is not available to a donee until a future date.

Essentially, a gift is anything of value — for example, money, property or the use of property — that you give someone without the expectation of receiving something back of equal value. This can include things we might not normally think about, such as letting someone use a vacation property for free or for discounted rent, lending someone money at no or low interest rates or selling something for less than fair market value. For gift tax purposes, the Internal Revenue Service (IRS) is interested in the total gifts made during a calendar year.

The IRS allows for an “annual exclusion” amount of gifting that can be made without having to report gifts on Form 709, the United States Gift (and Generational-Skipping Transfer) Tax Return. That annual exclusion amount is indexed for inflation and applies only to present interest gifts.

For 2019, the annual exclusion is $15,000 per donor, per donee. That means each individual can gift up to $15,000 to an unlimited number of other individuals without filing Form 709. A husband and wife could gift their son and daughter-in-law $60,000 in 2019 using the annual exclusion amounts. (The husband could gift $15,000 each to the son and daughter-in-law, and the wife could do the same.) Remember that all gifts throughout the year are counted though, so writing a $15,000 birthday check to someone and also giving them a new jacket for the holidays would technically put them above the annual exclusion.

Gifting above the annual exclusion amount does not automatically create a gift tax. Beyond the annual exclusion, each individual also has an $11.4 million lifetime exclusion for combined gift/estate transfers that avoids tax. That is the 2019 amount and is also indexed for inflation (and subject to change with changes in tax law).

Gifts above the annual exclusion amount (or some types of gifts like future interest gifts) require filing Form 709 to report the gift, and it eats up some of their $11.4 million lifetime exclusion. Generally, no tax would be due by the donor unless cumulative non-annual exclusion gifts exceed their lifetime exclusion. Also, gifts are not taxable to the donees except in unusual circumstances (such as “net gifts”).

An important exception to the normal gift tax rules relates to medical and educational expenses.  Individuals can make unlimited gifts on behalf of other individuals if the payments are for either qualified medical expenses or tuition expenses at educational organizations — as mentioned in Section 170(b)(1)(A)(ii), covering primary schools through college. The payments must be made directly to the institution or provider and cannot be paid to any individual to use towards those expenses. This can be a way to gift significant value to other individuals beyond annual exclusion gifting. Additionally, unlimited gifts are allowed to qualified charitable organizations and between spouses.

Implementing the fundamental gifting strategies outlined above is a very effective way to begin transferring wealth tax-free. Many more sophisticated planning and gifting techniques are available, and we’d be happy to discuss them with you. There are also different types of gifts, many of which were beyond the scope of this discussion, such as net gifts, incomplete gifts or split-interest gifts. If you have questions about gifting or would like to learn more about gifting strategies, contact Wipfli Financial Advisors.

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Fundamentals of Gifting to Individuals

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services and fees is set forth in Wipfli Financial’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Mark Albers
Mark Albers

CPA, MST, CFP® | Senior Financial Advisor

Mark Albers, CPA, MST, CFP®, is a Senior Financial Advisor for Wipfli Financial Advisors in Green Bay and Appleton, WI. Mark specializes in estate, retirement, tax and charitable giving planning for individuals and families.

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Financial Fundamentals of Gifting to Others

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